20 N.Y. 268

Lawrence
v.
Fox

Court of Appeals of New York 
December Term, 1859

 OPINION OF THE COURT

Appeal from the Superior Court of the city of Buffalo. On the trial before Mr. Justice Masten, it appeared by the evidence of a bystander, that one Holly, in November, 1857, at the request of the defendant, loaned and advanced to him $300, stating at the time that he owed that sum to the plaintiff for money borrowed of him, and had agreed to pay it to him the then next day; that the defendant in consideration thereof, at the time of receiving the money, promised to pay it to the plaintiff the then next day. Upon this state of facts the defendant moved for a nonsuit, upon three several grounds; viz.: That there was no proof tending to show that Holly was indebted to the plaintiff; that the agreement by the defendant with holly to pay the plaintiff was void for want of consideration, and that there was no privity between the plaintiff and the defendant. The court overruled the motion, and the counsel for the defendant excepted. The cause was then submitted to the jury, and they found a verdict for the plaintiff for the amount of the loan and interest, $344.66, upon which judgment was entered; from which the defendant appealed to the Superior Court, at general term, where the judgment was affirmed, and the defendant appealed to this court. The cause was submitted on printed arguments.

[269] H. GRAY, J.

The first objection raised on the trial amounts to this: That the evidence of the person present, who heard the declarations of Holly giving directions as to the payment of the money he was then advancing to the defendant, was mere hearsay and therefore not competent. Had the plaintiff sued Holly for this sum of money no objection to the competency of this evidence would have been thought of; and if the defendant had performed his promise by paying the sum loaned to him to the plaintiff, and Holly had afterwards sued him for its recovery, and this evidence had been offered by the defendant, it would doubtless have been received without an objection from any source. All the defendant had the right to [270] demand in this case was evidence which, as between Holly and the plaintiff, was competent to establish the relation between them of debtor and creditor. For that purpose the evidence was clearly competent; it covered the whole ground and warranted the verdict of the jury. But it is claimed that notwithstanding this promise was established by competent evidence, it was void for the want of consideration. It is now more than a quarter of a century since it was settled by the Supreme Court of this State—in an able and pains-taking opinion by the late Chief Justice SAVAGE, in which the authorities were fully examined and carefully analysed—that a promise in all material respects like the one under consideration was valid; and the judgment of that court was unanimously affirmed by the Court for the Correction of Errors. (Farley v. Cleaveland, 4 Cow., 432; same case in error, 9 id., 639.) In that case one Moon owed Farley and sold to Cleaveland a quantity of hay, in consideration of which Cleaveland promised to pay Moon's debt to Farley; and the decision in favor of Farley's right to recover was placed upon the ground that the hay received by Cleaveland from Moon was a valid consideration for Cleaveland's promise to pay Farley, and that the subsisting liability of Moon to pay Farley was no objection to the recovery. The fact that the money advanced by Holly to the defendant was a loan to him for a day, and that it thereby became the property of the defendant, seemed to impress the defendant's counsel with the idea that because the defendant's promise was not a trust fund placed by the plaintiff in the defendant's hands, out of which he was to realize money as from the sale of a chattel or the collection of a debt, the promise although made for the benefit of the plaintiff could not enure to his benefit. The hay which Cleaveland delivered to Moon was not to be paid to Farley, but the debt incurred by Cleaveland for the purchase of the hay, like the debt incurred by the defendant for money borrowed, was what was to be paid. That case has been often referred to by the courts of this State, and has never been doubted as sound authority for the principle upheld by it. (Barker v. Buklin, 2 Denio, 45; Hudson Canal [271] Company v. The Westchester Bank, 4 id., 97.) It puts to rest the objection that the defendant's promise was void for want of consideration. The report of that case shows that the promise was not only made to Moon but to the plaintiff Farley. In this case the promise was made to Holly and not expressly to the plaintiff; and this difference between the two cases presents the question, raised by the defendant's objection, as to the want of privity between the plaintiff and defendant. As early as 1806 it was announced by the Supreme Court of this State, upon what was then regarded as the settled law of England, "That where one person makes a promise to another for the benefit of a third person, that third person may maintain an action upon it." Schermerhorn v. Vanderheyden (1 John. R., 140), has often been re-asserted by our courts and never departed from. The case of Seaman v. White has occasionally been referred to (but not by the courts) not only as having some bearing upon the question now under consideration, but as involving in doubt the soundness of the proposition stated in Schermerhorn v. Vanderheyden. In that case one Hill, on the 17th of August, 1835, made his note and procured it to be indorsed by Seaman and discounted by the Phoenix Bank. Before the note matured and while it was owned by the Phoenix Bank, Hill placed in the hands of the defendant, Whitney, his draft accepted by a third party, which the defendant indorsed, and on the 7th of October, 1835, got discounted and placed the avails in the hands of an agent with which to take up Hill's note; the note became due, Whitney withdrew the avails of the draft from the hands of his agent and appropriated it to a debt due him from Hill, and Seaman paid the note indorsed by him and brought his suit against Whitney. Upon this state of facts appearing, it was held that Seaman could not recover: first, for the reason that no promise had been made by Whitney to pay, and second, if a promise could be implied from the facts that Hill's accepted draft, with which to raise the means to pay; the note, had been placed by Hill in the hands of Whitney, the promise would not be to Seaman, but to the Phoenix Bank who then owned the note; although, in the course of [272] the opinion of the court, it was stated that, in all cases the principle of which was sought to be applied to that case, the fund had been appropriated by an express undertaking of the defendant with the creditor. But before concluding the opinion of the court in this case, the learned judge who delivered it conceded that an undertaking to pay the creditor may be implied from an arrangement to that effect between the defendant and the debtor. This question was subsequently, and in a case quite recent, again the subject of consideration by the Supreme Court, when it was held, that in declaring upon a promise, made to the debtor by a third party to pay the creditor of the debtor, founded upon a consideration advanced by the debtor, it was unnecessary to aver a promise to the creditor; for the reason that upon proof of a promise made to the debtor to pay the creditor, a promise to the creditor would be implied. And in support of this proposition, in no respect distinguishable from the one now under consideration, the case of Schermerhorn v. Vanderheyden, with many intermediate cases in our courts, were cited, in which the doctrine of that case was not only approved but affirmed. (The Delaware and Hudson Canal Company v. The Westchester County Bank, 4 Denio, 97.) The same principle is adjudged in several cases in Massachusetts. I will refer to but few of them. (Arnold v. Lyman, 17 Mass., 400; Hall v. Marston, Id., 575; Brewer v. Dyer, 7 Cush., 337, 340.) In Hall v. Marston the court say: "It seems to have been well settled that if A promises B for a valuable consideration to pay C, the latter may maintain assumpsit for the money;" and in Brewer v. Dyer, the recovery was upheld, as the court said, "upon the principle of law long recognized and clearly established, that when one person, for a valuable consideration, engages with another, by a simple contract, to do some act for the benefit of a third, the latter, who would enjoy the benefit of the act, may maintain an action for the breach of such engagement; that it does not rest upon the ground of any actual or supposed relationship between the parties as some of the earlier cases would seem to indicate, but upon the broader and more satisfactory basis, that the law operating on the act [273] of the parties creates the duty, establishes a privity, and implies the promise and obligation on which the action is founded." There is a more recent case decided by the same court, to which the defendant has referred and claims that it at least impairs the force of the former cases as authority. It is the case of Mellen v. Whipple (1 Gray, 317). In that case one Rollins made his note for $500, payable to Ellis and Mayo, or order, and to secure its payment mortgaged to the payees a certain lot of ground, and then sold and conveyed the mortgaged premises to the defendant, by deed in which it was stated that the "granted premises were subject to a mortgage for $500, which mortgage, with the note for which it was given, the said Whipple is to assume and cancel." The deed thus made was accepted by Whipple, the mortgage was afterwards duly assigned, and the note indorsed by Ellis and Mayo to the plaintiff's intestate. After Whipple received the deed he paid to the mortgagees and their assigns the interest upon the mortgage and note for a time, and upon refusing to continue his payments was sued by the plaintiff as administratrix of the assignee of the mortgage and note. The court held that the stipulation in the deed that Whipple should pay the mortgage and note was a matter exclusively between the two parties to the deed; that the sale by Rollins of the equity of redemption did not lessen the plaintiff's security, and that as nothing had been put into the defendant's hands for the purpose of meeting the plaintiff's claim on Rollins, there was no consideration to support an express promise, much less an implied one, that Whipple should pay Mellen the amount of the note. This is all that was decided in that case, and the substance of the reasons assigned for the decision; and whether the case was rightly disposed of or not, it has not in its facts any analogy to the case before us, nor do the reasons assigned for the decision bear in any degree upon the question we are now considering. But it is urged that because the defendant was not in any sense a trustee of the property of Holly for the benefit of the plaintiff, the law will not imply a promise. I agree that many of the cases where a promise was implied were cases of trusts, [274] created for the benefit of the promiser. The case of Felton v. Dickinson (10 Mass., 189, 190), and others that might be cited, are of that class; but concede them all to have been cases of trusts, and it proves nothing against the application of the rule to this case. The duty of the trustee to pay the cestuis que trust, according to the terms of the trust, implies his promise to the latter to do so. In this case the defendant, upon ample consideration received from Holly, promised Holly to pay his debt to the plaintiff; the consideration received and the promise to Holly made it as plainly his duty to pay the plaintiff as if the money had been remitted to him for that purpose, and as well implied a promise to do so as if he had been made a trustee of property to be converted into cash with which to pay. The fact that a breach of the duty imposed in the one case may be visited, and justly, with more serious consequences than in the other, by no means disproves the payment to be a duty in both. The principle illustrated by the example so frequently quoted (which concisely states the case in hand) "that a promise made to one for the benefit of another, he for whose benefit it is made may bring an action for its breach," has been applied to trust cases, not because it was exclusively applicable to those cases, but because it was a principle of law, and as such applicable to those cases. It was also insisted that Holly could have discharged the defendant from his promise, though it was intended by both parties for the benefit of the plaintiff, and therefore the plaintiff was not entitled to maintain this suit for the recovery of a demand over which he had no control. It is enough that the plaintiff did not release the defendant from his promise, and whether he could or not is a question not now necessarily involved; but if it was, I think it would be found difficult to maintain the right of Holly to discharge a judgment recovered by the plaintiff upon confession or otherwise, for the breach of the defendant's promise; and if he could not, how could he discharge the suit before judgment, or the promise before suit, made as it was for the plaintiff's benefit and in accordance with legal presumption accepted by him (Berley v. Taylor, 5 Hill, 577-584, et seq.), until his dissent was [275] shown. The cases cited, and especially that of Farley v. Cleaveland, establish the validity of a parol promise; it stands then upon the footing of a written one. Suppose the defendant had given his note in which, for value received of Holly, he had promised to pay the plaintiff and the plaintiff had accepted the promise, retaining Holly's liability. Very clearly Holly could not have discharged that promise, be the right to release the defendant as it may. No one can doubt that he owes the sum of money demanded of him, or that in accordance with his promise it was his duty to have paid it to the plaintiff; nor can it be doubted that whatever may be the diversity of opinion elsewhere, the adjudications in this State, from a very early period, approved by experience, have established the defendant's liability; if, therefore, it could be shown that a more strict and technically accurate application of the rules applied, would lead to a different result (which I by no means concede), the effort should not be made in the face of manifest justice.

The judgment should be affirmed.

JOHNSON, Ch. J., DENIO, SELDEN, ALLEN and STRONG, Js., concurred. JOHNSON, Ch. J., and DENIO, J., were of opinion that the promise was to be regarded as made to the plaintiff through the medium of his agent, whose action he could ratify when it came to his knowledge, though taken without his being privy thereto.

COMSTOCK, J.  (Dissenting.)

The plaintiff had nothing to do with the promise on which he brought this action. It was not made to him, nor did the consideration proceed from him. If he can maintain the suit, it is because an anomaly has found its way into the law on this subject. In general, there must be privity of contract. The party who sues upon a promise must be the promisee, or he must have some legal interest in the undertaking. In this case, it is plain that Holly, who loaned the money to the defendant, and to whom the promise in question was made, could at any time have claimed that it should be performed to himself personally. He had lent the [276] money to the defendant, and at the same time directed the latter to pay the sum to the plaintiff. This direction he could countermand, and if he had done so, manifestly the defendant's promise to pay according to the direction would have ceased to exist. The plaintiff would receive a benefit by a complete execution of the arrangement, but the arrangement itself was between other parties, and was under their exclusive control. If the defendant had paid the money to Holly, his debt would have been discharged thereby. So Holly might have released the demand or assigned it to another person, or the parties might have annulled the promise now in question, and designated some other creditor of Holly as the party to whom the money should be paid. It has never been claimed, that in a case thus situated, the right of a third person to sue upon the promise rested on any sound principle of law. We are to inquire whether the rule has been so established by positive authority.

The cases which have sometimes been supposed to have a bearing on this question, are quite numerous. In some of them, the dicta of judges, delivered upon very slight consideration, have been referred to as the decisions of the courts. Thus, in Schermerhorn v. Vanderheyden (1 John., 140), the court is reported as saying, "We are of opinion, that where one person makes a promise to another, for the benefit of a third person, that third person may maintain an action on such promise." This remark was made on the authority of Dalton v. Poole (Vent., 318, 332), decided in England nearly two hundred years ago. It was, however, but a mere remark, as the case was determined against the plaintiff on another ground. Yet this decision has often been referred to as authority for similar observations in later cases.

In another class of cases, which have been sometimes supposed to favor the doctrine, the promise was made to the person who brought the suit, while the consideration proceeded from another; the question considered being, whether the promise was void by the statute of frauds. Thus, in Gold v. Phillips (10 Johns., 412), one Wood was indebted to the [277] plaintiffs for services as attorneys and counsel, and he conveyed a farm to the defendants, who, as part of the consideration, were to pay that debt. Accordingly, the defendants wrote to the plaintiffs, informing them that an arrangement had been made by which they were to pay the demand. The defence was, that the promise was void within the statute, because, although in writing, it did not express the consideration. But the action was sustained, on the ground that the undertaking was original and not collateral. So in the case of Farley v. Cleaveland (4 Cow., 432; 9 id., 639), the facts proved or offered to be proved were, that the plaintiff held a note against one Moon; that Moon sold hay to the defendant, who in consideration of that sale promised the plaintiff by parol to pay the note. The only question was, whether the statute of frauds applied to the case. It was held by the Supreme Court, and afterwards by the Court of Errors, that it did not. Such is also precisely the doctrine of Ellwood v. Monk (5 Wend., 235), where it was held, that a plea of the statute of frauds, to a count upon a promise of the defendant to the plaintiff, to pay the latter a debt owing to him by another person, the promise being founded on a sale of property to the defendant by the other person, was bad.

The cases mentioned, and others of a like character, were referred to by Mr. Justice JEWETT, in Barker v. Bucklin (2 Denio, 45). In that case, the learned justice considered at some length the question now before us. The authorities referred to were mainly those which I have cited, and others, upon the statute of frauds. The case decided nothing on the present subject, because it was determined against the plaintiff on a ground not involved in this discussion. The doctrine was certainly advanced which the plaintiff now contends for, but among all the decisions which were cited, I do not think there is one standing directly upon it. The case of Arnold v. Lyman (17 Mass., 400), might perhaps be regarded as an exception to this remark, if a different interpretation had not been given to that decision in the Supreme Court of the same State where it was pronounced. In the recent case of Mellen, Ad[278] ministratrix, v. Whipple (1 Gray, 317), that decision is understood as belonging to a class where the defendant has in his hands a trust fund, which was the foundation of the duty or promise in which the suit is brought.

The cases in which some trust was involved are also frequently referred to as authority for the doctrine now in question, but they do not sustain it. If A delivers money or property to B, which the latter accepts upon a trust for the benefit of C, the latter can enforce the trust by an appropriate action for that purpose. (Berly v. Taylor, 5 Hill, 577.) If the trust be of money, I think the beneficiary may assent to it and bring the action for money had and received to his use. If it be of something else than money, the trustee must account for it according to the terms of the trust, and upon principles of equity. There is some authority even for saying that an express promise founded on the possession of a trust fund may be enforced by an action at law in the name of the beneficiary, although it was made to the creator of the trust. Thus, in Comyn's Digest (Action on the case upon Assumpsit, B. 15), it is laid down that if a man promise a pig of lead to A, and his executor give lead to make a pig to B, who assumes to deliver it to A, an assumpsit lies by A against him. The case of The Delaware and Hudson Canal Company v. The Westchester County Bank (4 Denio, 97), involved a trust because the defendants had received from a third party a bill of exchange under an agreement that they would endeavor to collect it, and would pay over the proceeds when collected to the plaintiffs. A fund received under such an agreement does not belong to the person who receives it. He must account for it specifically; and perhaps there is no gross violation of principle in permitting the equitable owner of it to sue upon an express promise to pay it over. Having a specific interest in the thing, the undertaking to account for it may be regarded as in some sense made with him through the author of the trust. But further than this we cannot go without violating plain rules of law. In the case before us there was nothing in the nature of a trust or agency. The defendant borrowed the money of Holly and [279] received it as his own. The plaintiff had no right in the fund, legal or equitable. The promise to repay the money created an obligation in favor of the lender to whom it was made and not in favor of any one else.

I have referred to the dictum in Schermerhorn v. Vanderheyden (1 Johns., 140), as favoring the doctrine contended for. It was the earliest in this State, and was founded, as already observed, on the old English case of Dutton v. Poole, in Ventris. That case has always been referred to as the ultimate authority whenever the rule in question has been mentioned, and it deserves, therefore, some further notice. The father of the plaintiff's wife being seized of certain lands, which afterwards on his death descended to the defendant, and being about to cut £1,000 worth of timber to raise a portion for his daughter, the defendant promised the father, in consideration of his forbearing to cut the timber, that he would pay the said daughter the £1,000. After verdict for the plaintiff, upon the issue of non- assumpsit, it was urged in arrest of judgment, that the father ought to have brought the action, and not the husband and wife. It was held, after much discussion, that the action would lie. The court said, "It might be another case if the money had been to have been paid to a stranger; but there is such a manner of relation between the father and the child, and it is a kind of debt to the child to be provided for, that the plaintiff is plainly concerned." We need not criticise the reason given for this decision. It is enough for the present purpose, that the case is no authority for the general doctrine, to sustain which it has been so frequently cited. It belongs to a class of cases somewhat peculiar and anomalous, in which promises have been made to a parent or person standing in a near relationship to the person for whose benefit it was made, and in which, on account of that relationship, the beneficiary has been allowed to maintain the action. Regarded as standing on any other ground, they have long since ceased to be the law in England. Thus, in Crow v. Rogers (1 Strange, 592), one Hardy was indebted to the plaintiff in the sum of £70, and upon a discourse between Hardy and the defendant, it was [280] agreed that the defendant should pay that debt in consideration of a house, to be conveyed by Hardy to him. The plaintiff brought the action on that promise, and Dutton v. Poole was cited in support of it. But it was held that the action would not lie, because the plaintiff was a stranger to the transaction. Again, in Price v. Easton (4 Barn. & Adolph., 433), one William Price was indebted to the plaintiff in £13. The declaration averred a promise of the defendant to pay the debt, in consideration that William Price would work for him, and leave the wages in his hands; and that Price did work accordingly, and earned a large sum of money, which he left in the defendant's hands. After verdict for the plaintiff, a motion was made in arrest of judgment, on the ground that the plaintiff was a stranger to the consideration. Dutton v. Poole, and other cases of that class, were cited in opposition to the motion, but the judgment was arrested. Lord DENMAN said, "I think the declaration cannot be supported, as it does not show any consideration for the promise moving from the plaintiff to the defendant." LITTLEDALE, J., said, "No privity is shown between the plaintiff and the defendant. The case is precisely like Crow v. Rogers, and must be governed by it." TAUNTON, J., said, "It is consistent with all the matter alleged in the declaration, that the plaintiff may have been entirely ignorant of the arrangement between William Price and the defendant." PATTERSON, J., observed, "It is clear that the allegations do not show a right of action in the plaintiff. There is no promise to the plaintiff alleged." The same doctrine is recognized in Lilly v. Hays (5 Ad. & Ellis, 548), and such is now the settled rule in England, although at an early day there was some obscurity arising out of the case of Dutton v. Poole, and others of that peculiar class.

The question was also involved in some confusion by the earlier cases in Massachusetts. Indeed, the Supreme Court of that State seem at one time to have made a nearer approach to the doctrine on which this action must rest, than the courts of this State have ever done. (10 Mass., 287; 17 id., 400.) But in the recent case of Mellen, Administratrix, v. Whipple [281] (1 Gray, 317), the subject was carefully reviewed and the doctrine utterly overthrown. One Rollin was indebted to the plaintiff's testator, and had secured the debt by a mortgage on his land. He then conveyed the equity of redemption to the defendant, by a deed which contained a clause declaring that the defendant was to assume and pay the mortgage. It was conceded that the acceptance of the deed with such a clause in it was equivalent to an express promise to pay the mortgage debt; and the question was, whether the mortgagee or his representative could sue on that undertaking. It was held that the suit could not be maintained; and in the course of a very careful and discriminating opinion by Judge METCALF, it was shown that the cases which had been supposed to favor the action belonged to exceptional classes, none of which embraced the pure and simple case of an attempt by one person to enforce a promise made to another, from whom the consideration wholly proceeded. I am of that opinion.

The judgment of the court below should therefore be reversed, and a new trial granted.

GROVER, J., also dissented. Judgment affirmed.

69 N.Y. 280 (Ct. App. 1877)

 CHARLES W. VROOMAN, Guardian, etc., Respondent,
v.
HARRIET B. TURNER, Impleaded, etc., Appellant.

[280] A grantee of mortgaged premises whose conveyance recites that the land is conveyed subject to the mortgage, and that the grantee assumes and agrees to pay the same as part of the consideration, is not liable for a deficiency arising upon a foreclosure and sale, in case the grantor was not personally liable, legally or equitably, for the payment of the mortgage.^[1]

A mere stranger cannot claim the benefit of a contract between other parties; to entitle a third person to such a benefit there must be either a new consideration or some prior right or claim against one of the contracting parties, by which he has a legal interest in the performance of the agreement.^[2]

The cases similar to Lawrence v. Fox (20 N.Y., 268), holding that a promise to one for the benefit of a third person may avail to give an action to the latter against the promissor, collated and distinguished.

Vrooman v. Turner (8 Hun, 78), reversed in part.

(Argued April 2, 1877; decided April 10, 1877.)

APPEAL from judgment of the General Term of the Supreme Court in the second judicial department, affirming a judgment in favor of plaintiff, entered upon the report of a referee. (Reported below, 8 Hun, 78.)

This was an action to foreclose a mortgage.

The mortgage was executed in August, 1873, by defendant Evans, who then owned the mortgaged premises. He conveyed the same to one Mitchell, and through various mesne conveyances the title came to one Sanborn. In none of these conveyances did the grantee assume to pay the mortgage. Sanborn conveyed the same to defendant Harriet [281] B. Turner, by deed which contained a clause stating that the conveyance was subject to the mortgage, "which mortgage the party hereto of the second part hereby covenarts and agrees to pay off and discharge, the same forming part of the consideration thereof."

The referee found that said grantee, by so assuming payment of the mortgage, became personally liable therefor, and directed judgment against her for any deficiency. Judgment was entered accordingly.

Edward T. Bartlett, for the appellant. The appellant's covenant with Sanborn to assume the mortgage in suit did not constitute a cause of action. (King v. Whitely, 10 Paige, 465; Trotter v. Hughes, 12 N.Y., 74; Garnsey v. Rogers, 47 id., 233; Schermerhorn v. Vanderheyden, 1 J. R., 140; Farley v. Cleveland, 4 Cow., 432; Barker v. Bucklin, 2 Den., 45; D. & H. Canal Co. v. West. Co. Bank, 4 id., 97; Hall v. Robbins, 6 Barb., 33; Barker v. Bradley, 42 N.Y., 316; Claflin v. Ostrom, 54 id., 581; Glen v. Hope Mut. L. Ins. Co., 56 id., 379; Ricard v. Sanderson, 41 id., 179; Coster v. Mayor, etc., 43 id., 410; Dingledein v. Third Ave. R. R. Co., 37 id., 575; Van Schaick v. Third Ave. R. R. Co., 38 id., 346; Secor v. Lord, 3 Keyes, 525.) The appellant, being a married woman, is not bound by the covenant in the deed from Sanborn to her. (Chamberlain v. Parker, 45 N.Y., 569; Ballin v. Dillaye, 37 id., 35; White v. McNett, 33 id., 371; Yale v. Dederer, 22 id., 450; Corn Ex. Ins. Co. v. Babcock, 42 id., 613.)

N. H. Clement, for the respondent. The appellant was liable on her covenant. (Thorpe v. Keokuk Goal Co., 48 N.Y., 253; Coster v. Mayor, etc., 43 id., 411; Secor v. Lord, 3 Keyes, 525; Lawrence v. Fox, 20 N.Y., 268; Burr v. Beers, 24 id., 178; Dingledein v. Third Ave. R. R. Co., 37 id., 575; Van Schaick v. Third Ave. R. R. Co., 38 id., 346; Ricard v. Sanderson, 41 id., 179; Barker v. Bradley, 42 id., 322; Garnsey v. Rogers, 47 id., 233.) The fact of the [282] appellant being a married woman did not relieve her from liability on her covenant. (Frecking v. Rolland, 53 N.Y., 425; Ballin v. Dillaye, 37 id., 35; Maxon v. Scott, 55 id., 247.)

ALLEN, J. The precise question presented by the appeal in this action has been twice before the courts of this State, and received the same solution in each. It first arose in King v. Whitely, 10 Paige, 465, decided in 1843. There the grantor of an equity of redemption in mortgaged premises, neither legally nor equitably interested in the payment of the bond and mortgage except so far as the same were a charge upon his interest in the lands, conveyed the lands subject to the mortgage, and the conveyance recited that the grantees therein assumed the mortgage, and were to pay off the same as a part of the consideration of such conveyance, and it was held that as the grantor in that conveyance was not personally liable to the holder of the mortgage to pay the same, the grantees were not liable to the holder of such mortgage for the deficiency upon a foreclosure and sale of the mortgaged premises. It was conceded by the chancellor that if the grantor had been personally liable to the holder of the mortgage for the payment of the mortgage debt, the holder of such mortgage would have been entitled in equity to the benefit of the agreement recited in such conveyance, to pay off the mortgage and to a decree over against the grantees for the deficiency. This would have been in accordance with a well established rule in equity, which gives to the creditor the right of subrogation to and the benefit of any security held by a surety for the re-enforcement of the principal debt, and in the case supposed, and by force of the agreement recited in the conveyance, the grantee would have become the principal debtor, and the grantor would be a quasi surety for the payment of the mortgage debt. (Halsey v. Reed, 9 Paige, 446; Curtis v. Tyler, id., 432; Burr v. Beers, 24 N.Y., 178.)

King v. Whitely was followed, and the same rule applied [283] by an undivided court in Trotter v. Hughes, 12 N.Y., 74, and the same case was cited with approval in Garnsey v. Rogers, 47 N.Y., 233.

The clause in the conveyance in Trotter v. Hughes was not in terms precisely like that in King v. Whitely, or in the grant under consideration. The undertaking by the grantees to pay the mortgage debt as recited, was not in express terms, or as explicit as in the other conveyances. But the recital was, I think, sufficient to justify the inference of a promise to pay the debt, and so it must have been regarded by the court. The case was not distinguished by the court in any of its circumstances from King v. Whitely, but was supposed to be on all fours with and governed by it. Had the grantor in that case been personally bound for the payment of the debt, I am of the opinion that an action would have been sustained against the grantee upon a promise implied from the terms of the grant accepted by him to pay it, and indemnify the grantor. It must have been so regarded by this court, otherwise no question would have been made upon it, and the court would not have so seriously and ably fortified and applied the doctrine of King v. Whitely. A single suggestion that there was no undertaking by the grantee and no personal liability for the payment of the debt assumed by him, would have disposed of the claim to charge him for the deficiency upon the sale of the mortgaged premises. The rule which exempts the grantee of mortgaged premises subject to a mortgage, the payment of which is assumed in consideration of the conveyance as between him and his grantor, from liability to the holder of the mortgage when the grantee is not bound in law or equity for the payment of the mortgage, is founded in reason and principle, and is not inconsistent with that class of cases in which it has been held that a promise to one for the benefit of a third party may avail to give an action directly to the latter against the promissor, of which Lawrence v. Fox (20 N.Y., 268), is a prominent example. To give a third party who may derive a benefit from the performance of the [284] promise, an action, there must be, first, an intent by the promissee to secure some benefit to the third party, and second, some privity between the two, the promissee and the party to be benefited, and some obligation or duty owing from the former to the latter which would give him a legal or equitable claim to the benefit of the promise, or an equivalent from him personally.

It is true there need be no privity between the promissor and the party claiming the benefit of the undertaking, neither is it necessary that the latter should be privy to the consideration of the promise, but it does not follow that a mere volunteer can avail himself of it. A legal obligation or duty of the promissee to him, will so connect him with the transaction as to be a substitute for any privity with the promissor, or the consideration of the promise, the obligation of the promissee furnishing an evidence of the intent of the latter to benefit him, and creating a privity by substitution with the promissor. A mere stranger cannot intervene, and claim by action the benefit of a contract between other parties. There must be either a new consideration or some prior right or claim against one of the contracting parties, by which he has a legal interest in the performance of the agreement.

It is said in Garnsey v. Rodgers (47 N.Y. 233), that it is not every promise made by one person to another from the performance of which a third person would derive a benefit that gives a right of action to such third person, he being privy neither to the contract nor the consideration. In the language of Judge RAPALLO, "to entitle him to an action, the contract must have been made for his benefit. He must be the party intended to be benefited." See, also, Turk v. Ridge (41 N.Y., 201), and Merrill v. Green (55 id, 270), in which, under similar agreements third parties sought to maintain an action upon engagements by the performance of which they would be benefited, but to which they were not parties, and failed. The courts are not inclined to extend the doctrine of Lawrence v. Fox to cases not clearly within [285] the principle of that decision. Judges have differed as to the principle upon which Lawrence v. Fox and kindred cases rest, but in every case in which an action has been sustained there has been a debt or duty owing by the promissee to the party claiming to sue upon the promise. Whether the decisions rest upon the doctrine of agency, the promissee being regarded as the agent for the third party, who, by bringing his action adopts his acts, or upon the doctrine of a trust, he promissor being regarded as having received money or other thing for the third party, is not material. In either case there must be a legal right, founded upon some obligation of the promissee, in the third party, to adopt and claim the promise as made for his benefit.

In Lawrence v. Fox a prominent question was made in limine, whether the debt from Halley to the plaintiff was sufficiently proved by the confession of Halley made at the time of the loan of the money to the defendant. It was assumed that if there was no debt proved the action would anot lie, and the declaration of Halley the debtor was held sufficient evidence of the debt. GRAY, J., said: "All the defendant had the right to demand in this case was evidence which as between Halley and the plaintiff was competent to establish the relation between them of debtor and creditor." In Burr v. Beers, (24 N.Y., 178), and Thorp v. Keokuk Coal Co., (48 N.Y., 253), the grantor of the defendant was personally liable to pay the mortgage to the plaintiff, and the cases were therefore clearly within the principle of Lawrence v. Fox, Halsey v. Reed, and Curtis v. Tyler, supra. See also per BOSWORTH, J., Doolittle v. Naylor, (2 Bos., 225); and Ford v. David (1 Bos., 569). It is claimed that King v. Whitely and the cases following it were overruled by Lawrence v. Fox. But it is very clear that it was not the intention to overrule them, and that the cases are not inconsistent. The doctrine of Lawrence v. Fox, although questioned and criticised, was not first adopted in this state by the decision of that case. It was expressly adjudged as early as 1825, in Farley v. Cleveland, (4 Cow., 432), affirmed in the court [286] for the correction of errors in 1827, per totam curiam, and reported in 9 Cow., 639. The chancellor was not ignorant of these decisions when he decided King v. Whitely, nor was Judge DENIO and his associates unaware of them when Trotter v. Hughes was decided, and Judge GRAY in Lawrence v. Fox says the case of Farley v. Cleveland had never been doubted.

The court below erred in giving judgment against the appellant for the deficiency after the sale of the mortgaged premises, and so much of the judgment as directs her to pay the same must be reversed with costs.

All concur, except EARL, J., dissenting.

Judgment accordingly.

[1] Cashman v. Henry, 75 N.Y. 106; Thayer v. Marsh, id. 342; Pardee v. Treat, 82 id. 388; Dunning v. Leavitt, 85 id. 35; Carter v. Holahan, 92 id. 504; Matter of Wilbur v. Warren, 104 id. 198; Biddel v. Brizzolara, 64 Cal. 362. Not followed, Dean v. Walker, 107 Ill. 547; Birke v. Abbott, 103 Iad. 6.

[2] Wheat v. Rice, 97 N.Y. 302; Litchfield v. Flint, 104 id. 550; Meech v. Ensign, 49 Conn. 210; Davis v. Clinton Water Wks. Co., 54 Iowa, 62; Wright v. Briggs, 99 Ind. 566; Stuart v. Worden, 42 Mich. 161; Ferries v. Carson Water Co., 16 Nev. 47; Brewster v. Maurer, 38 Ohio St. 550.

224 N.Y. 223
MARION E. SEAVER, Respondent,
v.
MATT C. RANSOM et al., as Executors of SAMUEL A. BEMAN, Deceased, Appellants.
Court of Appeals of New York

[234]

(Argued June 12, 1918; decided October 1, 1918.)

APPEAL from a judgment of the Appellate Division of the Supreme Court in the third judicial department, entered January 7, 1918, affirming a judgment in favor of plaintiff entered upon a decision of the court at a Trial Term, a jury having been waived.

The nature of the action and the facts, so far as material, are stated in the opinion.

Frederick H. Bryant for appellants. Plaintiff cannot recover in an action at law. In order to give a third party, who may derive benefit from the performance of a promise, an action there must be: An intent by the promisee to secure some benefit to the third party; some privity between the two, the promisee and the party to be benefited, or some obligation or duty owing from the former to the latter, which would give plaintiff a legal or equitable claim to the benefit of the promise, or an equivalent from the promisee personally. (Lawrence v. Fox, 20 N. Y. 268; Burr v. Beers, 24 N. Y. 178; Garnsey v. Rogers, 47 N. Y. 233; Vrooman v. Turner, 69 N. Y. 280; Lorillard v. Clyde, 122 N. Y. 498; Durnherr v. Rau, 135 N. Y. 219; Townsend v. Rackham, 143 N. Y. 516; French v. Vix, 143 N. Y. 90; Embler v. Hartford Steam Boiler Co., 158 N. Y. 431; Borland v. Welch, 162 N. Y. 104; Rigney v. N. Y. C. & H. R. R. R. Co., 217 N. Y. 31; Wait v. Wilson, 86 App. Div. 485; Lockwood v. Smith, 143 N. Y. Supp. 480; Coleman v. Hiler, 85 Hun. 547.) Specific performance cannot be decreed. (Phalen v. U.S. Trust Co., 186 N. Y. 178.) There is no trust, express, implied or secret. (Matter of O'Hara, 95 N. Y. 403: Amherst College v. Ritch, 151 N. Y. 282; Hamlin v. [235] Stevens, 177 N. Y. 39; Mahaney v. Carr, 175 N. Y. 454; Ide v. Brown, 178 N. Y. 26; Bull v. Bull, 31 Hun, 69; Crippen v. Crippen, 53 Hun, 233; Ahrens v. Jones, 169 N. Y. 555.)

John P. Kellas for respondent. The agreement between Mrs. Beman and her husband at the time of the execution of her will was valid and can be enforced in this action. (Amherst College v. Ritch, 151 N. Y. 282; Matter of O'Hara, 95 N. Y. 403; Crippen v. Crippen, 53 Hun, 232; Bull v. Bull, 31 Hun, 69; Burr v. Burr, 24 N. Y. 178; Clark v. Howard, 150 N. Y. 232; Ahrens v. Jones, 169 N. Y. 555; McClellan v. Grant, 83 App. Div. 599; Goldsmith v. Goldsmith, 145 N. Y. 313; Gallagher v. Gallagher, 135 App. Div. 457.)

POUND, J. Judge Beman and his wife were advanced in years. Mrs. Beman was about to die. She had a small estate consisting of a house and lot in Malone and little else. Judge Beman drew his wife's will according to her instructions. It gave $1,000 to plaintiff, $500 to one sister, plaintiff's mother, and $100 each to another sister and her son, the use of the house to her husband for life, remainder to the American Society for the Prevention of Cruelty to Animals. She named her husband as residuary legatee and executor. Plaintiff was her niece, thirty-four years old, in ill health, sometimes a member of the Beman household. When the will was read to Mrs. Beman she said that it was not as she wanted it; she wanted to leave the house to plaintiff. She had no other objection to the will, but her strength was waning and although the judge offered to write another will for her, she said she was afraid she would not hold out long enough to enable her to sign it. So the judge said if she would sign the will he would leave plaintiff enough in his will to make up the difference. He [236] avouched the promise by his uplifted hand with all solemnity and his wife then executed the will. When he came to die it was found that his will made no provision for the plaintiff.

This action was brought and plaintiff recovered judgment in the trial court on the theory that Beman had obtained property from his wife and induced her to execute the will in the form prepared by him by his promise to give plaintiff $6,000, the value of the house, and that thereby equity impressed his property with a trust in favor of plaintiff. Where a legatee promises the testator that he will use property given him by the will for a particular purpose, a trust arises. (O'Hara v. Dudley, 95 N. Y. 403; Trustees of Amherst College v. Bitch, 151 N. Y. 282; Ahrens v. Jones, 169 N. Y. 555.) Beman received nothing under his wife's will but the use of the house in Malone for life. Equity compels the application of property thus obtained to the purpose of the testator, but equity cannot so impress a trust except on property obtained by the promise. Beman was bound by his promise, but no property was bound by it; no trust in plaintiff's favor can be spelled out.

An action on the contract for damages or to make the executors trustees for performance stands on different ground. (Farmers Loan & Trust Co. v. Mortimer, 219 N. Y. 290, 294, 295.) The Appellate Division properly passed to the consideration of the question whether the judgment could stand upon the promise made to the wife, upon a valid consideration, for the sole benefit of plaintiff. The judgment of the trial court was affirmed by a return to the general doctrine laid down in the great case of Lawrence v. Fox (20 N. Y. 268) which has since been limited as herein indicated. 

Contracts for the benefit of third persons have been the prolific source of judicial and academic discussion. (Williston, Contracts for the Benefit of a Third Person, [237] 15 Harvard Law Review, 767; Corbin, Contracts for the Benefit of Third Persons, 27 Yale Law Review, 1008.) The general rule, both in law and equity (Phalen v. U. S. Trust Co., 186 N. Y. 178, 186), was that privity between a plaintiff and a defendant is necessary to the maintenance of an action on the contract. The consideration must be furnished by the party to whom the promise was made. The contract cannot be enforced against the third party and, therefore, it cannot be enforced by him. On the other hand, the right of the beneficiary to sue on a contract made expressly for his benefit has been fully recognized in many American jurisdictions, either by judicial decision or by legislation, and is said to be "the prevailing rule in this country." (Hendrick v. Lindsay, 93 U. S. 143; Lehow v. Simonton, 3 Col. 346.) It has been said that "the establishment of this doctrine has been gradual, and is a victory of practical utility over theory, of equity over technical subtlety." (Brantly on Contracts [2d ed.], p. 253.) The reasons for this view are that it is just and practical to permit the person for whose benefit the contract is made to enforce it against one whose duty it is to pay. Other jurisdictions still adhere to the present English rule (7 Halsbury's Laws of England, 342, 343; Jenks' Digest of English Civil Law, § 229) that a contract cannot be enforced by or against a person who is not a party. (Exchange Bank v. Rice, 107 Mass. 37; but see, also, Forbes v. Thorpe, 209 Mass. 570; Gardner v. Denison, 217 Mass. 492.) In New York the right of the beneficiary to sue on contracts made for his benefit is not clearly or simply defined. It is at present confined, first, to cases where there is a pecuniary obligation running from the promisee to the beneficiary; "a legal right founded upon some obligation of the promisee in the third party to adopt and claim the promise as made for his benefit." (Farley v. Cleveland, 4 Cow. 432; Lawrence v. Fox, supra; [238] Garnsey v. Rogers, 47 N. Y. 233; Vrooman v. Turner, 69 N. Y. 280; Lorillardv. Clyde, 122 N. Y. 498; Durnherr v. Rau, 135 N. Y. 219; Townsend v. Rackham, 143 N. Y. 516; Sullivan v. Sullivan, 161 N. Y. 554.) Secondly, to cases where the contract is made for the benefit of the wife (Buchanan v. Tilden, 158 N. Y. 109; Bouton v. Welch, 170 N. Y. 554), affianced wife (De Cicco v. Schweizer, 221 N. Y. 431), or child (Todd v. Weber, 95 N. Y. 181, 193; Matter of Kidd, 188 N. Y. 274) of a party to the contract. The close relationship cases go back to the early King's Bench case (1677), long since repudiated in England, of Button v. Poole (2 Lev. 210; s. c, 1 Ventris, 318, 332). (Schemerhorn v. Vanderheyden, 1 Johns. 139.) The natural and moral duty of the husband or parent to provide for the future of wife or child sustains the action on the contract made for their benefit. "This is the farthest the cases in this state have gone," says CULLEN, J., in the marriage settlement case of Borland v. Welch (162 N. Y. 104, 110).

The right of the third party is also upheld in, thirdly, the public contract cases (Little v. Banks, 85 N. Y. 258; Pond v. New Rochelle Water Co., 183 N. Y. 330; Smyth v. City of New York, 203 N. Y. 106; Farnsworth v. Boro Oil & Gas Co., 216 N. Y. 40, 48; Rigney v. N. Y. C. & H. R. R. R. Co., 217 N. Y. 31; Matter of International Ry. Co. v. Rann, 224 N. Y. 83; cf. German Alliance Ins. Co. v. Home Water Supply Co., 226 U. S. 220) where the municipality seeks to protect its inhabitants by covenants for their benefit and, fourthly, the cases where, at the request of a party to the contract, the promise runs directly to the beneficiary although he does not furnish the consideration. (Rector, etc., v. Teed, 120 N. Y. 583; F. N. Bank of Sing Sing v. Chalmers, 144 N. Y. 432, 439; Hamilton v. Hamilton, 127 App. Div. 871, 875.) It may be safely said that a general rule sustaining recovery at the suit of the [239] third party would include but few classes of cases not included in these groups, either categorically or in principle.

The desire of the childless aunt to make provision for a beloved and favorite niece differs imperceptibly in law or in equity from the moral duty of the parent to make testamentary provision for a child. The contract was made for the plaintiff's benefit. She alone is substantially damaged by its breach. The representatives of the wife's estate have no interest in enforcing it specifically. It is said in Buchanan v. Tilden that the common law imposes moral and legal obligations upon the husband and the parent not measured by the necessaries of life. It was, however, the love and affection or the moral sense of the husband and the parent that imposed such obligations in the cases cited rather than any common-law duty of husband and parent to wife and child. If plaintiff had been a child of Mrs. Beman, legal obligation would have required no testamentary provision for her, yet the child could have enforced a covenant in her favor identical with the covenant of Judge Beman in this case. (De Cicco v. Schweizer, supra.) The constraining power of conscience is not regulated by the degree of relationship alone. The dependent or faithful niece may have a stronger claim than the affluent or unworthy son. No sensible theory of moral obligation denies arbitrarily to the former what would be conceded to the latter. We might consistently either refuse or allow the claim of both, but I cannot reconcile a decision in favor of the wife in Buchanan v. Tilden based on the moral obligations arising out of near relationship with a decision against the niece here on the ground that the relationship is too remote for equity's ken. No controlling authority depends upon so absolute a rule. In Sullivan v. Sullivan (supra) the grandniece lost in a litigation with the aunt's estate founded on a certificate of deposit payable to the aunt "or in case of her death to her niece," but [240] what was said in that case of the relations of plaintiff's intestate and defendant does not control here, any more than what was said in Durnherr v. Rau (supra) on the relation of husband and wife, and the inadequacy of mere moral duty, as distinguished from legal or equitable obligation, controlled the decision in Buchanan v. Tilden. Borland v. Welch (supra) deals only with the rights of volunteers under a marriage settlement not made for the benefit of collaterals.

KELLOGG, P. J., writing for the court below well said: "The doctrine of Lawrence v. Fox is progressive, not retrograde. The course of the late decisions is to enlarge, not to limit the effect of that case." The court in that leading case attempted to adopt the general doctrine that any third person, for whose direct benefit a contract was intended, could sue on it. The head note thus states the rule. FINCH, J., in Gifford v. Corrigan (117 N. Y. 257, 262) says that the case rests upon that broad proposition; EDWARD T. BARTLETT, J., in Pond v. New Rochelle Water Co. (183 N. Y. 330, 337) calls it "the general principle;" but Vrooman v. Turner (supra) confined its application to the facts on which it was decided. " In every case in which an action has been sustained," says ALLEN, J., "there has been a debt or duty owing by the promisee to the party claiming to sue upon the promise." (69 N. Y. 285.) As late as Townsend v. Rackham (143 N. Y. 516, 523) we find PECKHAM, J., saying that "to maintain the action by the third person there must be this liability to him on the part of the promisee." Buchanan v. Tilden went further than any case since Lawrence v. Fox in a desire to do justice rather than to apply with technical accuracy strict rules calling for a legal or equitable obligation. In Embler v. Hartford Steam Boiler Inspection & Ins. Co. (158 N. Y. 431) it may at least be said that a majority of the court did not avail themselves of the opportunity to concur with the [241] views expressed by GRAY, J.,— who wrote the dissenting opinion in Buchanan v. Tilden,— to the effect that an employee could not maintain an action on an insurance policy issued to the employer, which covered injuries to employees.

In Wright v. Glen Telephone Co. (48 Misc. Rep. 192, 195) the learned presiding justice who wrote the opinion in this case said, at Trial Term: "The right of a third person to recover upon a contract made by other parties for his benefit must rest upon the peculiar circumstances of each case rather than upon the law of some other case." "The case at bar is decided upon its peculiar facts." (EDWARD T. BARTLETT, J., in Buchanan v. Tilden.) But, on principle, a sound conclusion may be reached. If Mrs. Beman had left her husband the house on condition that he pay the plaintiff $6,000 and he had accepted the devise, he would have become personally liable to pay the legacy and plaintiff could have recovered in an action at law against him, whatever the value of the house. (Gridley v. Gridley, 24 N. Y. 130; Brown v. Knapp, 79 N. Y. 136, 143; Dinan v. Coneys, 143 N. Y. 544, 547; Blackmore v. White, [1899] 1 Q. B. 293, 304.) That would be because the testatrix had in substance bequeathed the promise to plaintiff and not because close relationship or moral obligation sustained the contract. The distinction between an implied promise to a testator for the benefit of a third party to pay a legacy and an unqualified promise on a valuable consideration to make provision for the third party by will is discernible but not obvious. The tendency of American authority is to sustain the gift in all such cases and to permit the donee-beneficiary to recover on the contract. (Matter of Edmundson's Estate, [1918, Pa.] 103 Atl. Rep. 277.) The equities are with the plaintiff and they may be enforced in this action, whether it be regarded as an [242] action for damages or an action for specific performance to convert the defendants into trustees for plaintiff's benefit under the agreement.

The judgment should be affirmed, with costs.

HOGAN, CARDOZO and CRANE, JJ., concur; HISCOCK, Ch. J., COLLIN and ANDREWS, JJ., dissent.

Judgment affirmed.

219 F.2d 645 (1955)

SOCONY-VACUUM OIL COMPANY, Incorporated, Plaintiff-Appellant,
v.
CONTINENTAL CASUALTY COMPANY, Defendant-Appellee.

No. 156, Docket 23179.
United States Court of Appeals, Second Circuit.
Argued January 13, 1955.
Decided February 7, 1955.

[646] Edmunds, Austin & Wick, Burlington, Vt., for plaintiff-appellant.

Fletcher B. Joslin, Theriault & Joslin, Montpelier, Vt. (Andrew Eckel, New York City, Donald B. Knight, Brooklyn, N. Y., of counsel), for defendant-appellee.

Before CLARK, Chief Judge, and FRANK and HINCKS, Circuit Judges.

HINCKS, Circuit Judge.

The Bennett-Stewart Co., Inc. (hereinafter referred to as the prime contractor) was awarded a contract by the United States Government to construct a radar station at St. Albans, Vermont, and gave the "performance bond" and the "payment bond" required by the Miller Act, 40 U.S.C.A. §§ 270a, 270b.^[1] The prime contractor entered into a subcontract with R. F. Carpenter, Inc. (hereinafter referred to as the subcontractor) for road and parking area construction work around the radar station. Obviously having in mind its liabilities under the Miller Act to the subcontractor's materialmen, the prime contractor required the subcontractor to furnish a surety bond. The subcontractor, accordingly, provided a surety bond whereby it, as principal, and the defendant surety company, as surety, obligated themselves to the prime contractor in the penal sum of $162,000. This bond, which was made a part of the complaint, was conditioned as follows:

"Whereas, the above bounden Principal has entered into a certain written contract with the above named Obligee, dated the 8th day of May, 1950, for the construction of Roads, Parking Areas, etc., at St. Albans, Vermont.

Which contract is hereby referred to and made a part hereof as fully and to the same extent as if copied at length herein.

Now Therefore, The Condition of The Above Obligation Is Such, That if the above bounden Principal shall pay all labor and material obligations and shall well and truly keep, do and perform, each and every, all and singular, the matters and things in said contract set forth and specified to be by the said Principal kept, done and performed at the time and [647] in the manner in said contract specified, and shall pay over, make good and reimburse to the above named Obligee, all loss and damage which said Obligee may sustain by reason of failure or default on the part of said Principal, then this obligation shall be void; otherwise to be and remain in full force and effect."

The plaintiff herein was a materialman of the subcontractor which, having failed within the time limitations of the proviso in Section 2 of the Miller Act, 40 U.S. C.A. § 270b(a), to perfect its rights against the surety on the prime contractor's payment bond, brought this action in the United States District Court for the District of Vermont to recover for material furnished by it to the subcontractor for use in the performance of the subcontract and hence a part of the material provided in the prosecution of the main contract. The basis of jurisdiction is diversity of citizenship and no jurisdictional problem is presented.

In the court below the defendant moved to dismiss on the ground that the plaintiff had no right in the bond because the bond was for the benefit of the prime contractor only and not third parties, and that the plaintiff by failing to pursue its rights against the prime contractor under the Miller Act had injured the defendant. This motion was granted, 122 F.Supp. 621, on the ground that the bond was given only for the benefit of the prime contractor, and not for the protection of the plaintiff as a materialman. From the ensuing judgment this appeal is prosecuted.

The record shows that the defendant Casualty Company was an Illinois corporation, that its principal — the subcontractor — was a Vermont corporation, and that the prime contractor was a Massachusetts corporation, and that the subcontract was one to be performed in Vermont. There is nothing in the record to show that the parties to the bond contemplated or agreed that it was to be interpreted or governed by the law of any particular state. Accordingly, we think the problem presented should be determined by the law of Vermont. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188.

However, there seems to be neither statute nor judicial precedent in Vermont bearing on the problem. And the problem presented has been variously decided in various jurisdictions. Confronted with this dilemma our task is not to surmise which line of judicial precedent a Vermont court would follow if presented with the case, but rather, by looking to the same sources which a Vermont court would presumably consult and by weighing the comparative reasoning of learned authors and conflicting judicial decisions for their intrinsic soundness, to define the pertinent law which when thus ascertained is presumably the law of Vermont even though as yet unannounced by a Vermont Court. See Moore, Commentary on the United States Judicial Code, pp. 338-340.

Professor Corbin in his work on law of contracts, 4 Corbin on Contracts, Sections 798-804, has this to say: "* * * the third party has an enforcible right if the surety promises in the bond, either in express words or by reasonable implication, to pay money to him. If there is such a promissory expression as this, there need be no discussion of 'intention to benefit'. We need not speculate for whose benefit the contract was made, or wonder whether the promisee was buying the promise for his own selfish interest or for philanthropic purposes. It is a much simpler question: Did the surety promise to pay money to the plaintiff?" See also Corbin, "Contractor's Surety Bonds," 38 Yale Law Journal 1. This doctrine, we think, has the support of the great weight of authority. A long line of cases cited to such doctrine in 77 A.L.R. 53 amplifies the cases which Professor Corbin particularly cites.

It is true that in the bond here sued on the only expressly promissory words are those whereby the surety acknowledges itself bound to the prime contractor, as obligee, in the penal sum of $162,000. But since the bond is stated to be on condition that the principal — here the [648] subcontractor — "shall pay all labor and material obligations," the words of the condition are the full equivalent of words of direct promise.^[2]

We are unable to recognize either the validity or the relevance of the conclusion of the trial judge that the bond was given only for the benefit of the prime contractor and not for the protection of materialmen. Doubtless the prime contractor in requiring a bond of its subcontractor sought protection against his own liability to materialmen of the subcontractor. But this he obtained through a bond requiring the payment of the materialmen. Obviously it was contemplated that performance under the bond would benefit not only the prime contractor who would thereby be exonerated from liability to the materialmen thus paid but also the materialmen of the subcontractor who were thereby to be paid.

But this aside, we think it was wholly irrelevant for the trial judge to speculate as to the motives of the parties of the bond. The scope of the bond, like any written contract, must be determined not by the unexpressed motive of the parties but rather by the ordinary meaning of the words which they used. By this simple test, the defendant here was plainly obligated to pay "material obligations" such as that sued on here.

The situation is affected not at all by the fact that the plaintiff failed to perfect its rights under the Miller Act against the prime contractor and its surety. The bond now sought to reach was not one required under that Act and the rights to which it gave rise are not qualified by the Act or conditioned upon the timely pursuit of remedies under that Act. The rights under this bond must be determined by its language interpreted as of the date it was given. At that time, of course, it was not known whether all or some of the materialmen would fail or decline to press their rights under the Miller Act.

Moreover, the bond was conditioned not only on the payment of "material obligations" but also on reimbursement to the obligee of "all loss and damage which said obligee may sustain by reason of failure or default on the part of said Principal." This latter branch of the condition was broad enough to protect the prime contractor against claims of materialmen which through timely prosecution had actually caused loss to the prime contractor or his surety. The branch of the condition calling for payment of material obligations without limitation to those which might be timely prosecuted under the Miller Act imports an intent that all were to be included within the obligation of the bond.

The judge below relied on the case of Spokane Merchants' Ass'n v. Pacific Surety Co., 1915, 86 Wash. 489, 150 P. 1054, and in support of his ruling the plaintiff-appellee cites the recent case of McGrath v. American Surety Company of New York, 307 N.Y. 552, 122 N.E.2d [649] 906. The McGrath decision was predicated on prior decisions of that court, viz.: Eastern Steel Co. v. Globe Indemnity Co., 227 N.Y. 586, 125 N.E. 917; Buffalo Cement Co. v. McNaughton, 90 Hun 74, 35 N.Y.S. 453, affirmed on opinion below, 156 N.Y. 702, 51 N.E. 1089, and Fosmire v. National Surety Co., 229 N.Y. 44, 127 N.E. 472. But these three cases which the court cited in the McGrath opinion were all cases relating to bonds in which a prime contractor was the principal and the state or a municipality was the obligee: in each, the bond given was one required by statute or ordinance. Consequently none involved the rights of materialmen against the surety of a subcontractor under a private bond. Certainly these cases are not apposite to the case before us: considerations of public policy affecting the scope of statutory bonds are absent when it comes to determine the scope of a private bond. Notwithstanding, we find, at least in the Fosmire and Buffalo Cement cases, dicta which we think support our holding here as to the plaintiff's right under a private bond.

We do not blink the fact that the McGrath case, as far as appears from the facts stated in the opinion, is legally indistinguishable from that now before us. True, in McGrath the subcontractor furnished both a payment bond and a performance bond whereas here a single bond is involved which is conditioned both for payment of "material obligations" and for performance of the subcontract. But this, we think, is a difference without legal significance. But both the Spokane and the McGrath cases and others of similar purport we think out of line with the great weight of authority referred to above. With deference, we suggest that it is unfortunate doctrine to modify the scope of a plainly stated written obligation in a private bond by the supposed motive of the obligee, as these cases seem to do. Such doctrine leads to unnecessary and undesirable uncertainty in business relationships. It means that one within the orbit of a private bond cannot rely upon a plainly stated obligation: instead he must search for the undisclosed motive of the parties and take that as the measure of his rights.

In cases such as these involving a private bond not required by statute, even if — contrary to our view — there be need to search for the motive which led to the taking of a bond, we find a lack of rational basis for an analysis which goes no further than to recognize intent to provide protection to the obligee against actually accrued liability under some statute such as the Miller Act. To say that the object of the bond was only to protect the obligee against liabilities imposed upon him by the Miller Act overlooks the fact that the bond was not required by that Act and calls for the payment of "all labor and material obligations" without express limitation to liabilities of the obligee under the Miller Act. In our view, the object of the bond was to accomplish the payment of these obligations and by such payment to provide protection to the obligee. If the obligee sought indemnity only or if it wished to exclude third parties from benefit under a surety bond, the natural presumption is that it would not have required a surety's payment bond. But here the prime contractor required a payment bond and paid the premium for a payment bond, at least indirectly under the terms of the subcontract whereby the subcontractor made the direct payment. And the defendant in return for the premium, furnished a payment bond. It follows that the surety should not be allowed to avoid the obligation which it was paid to assume by suggesting that as things turned out the obligee did not need all the protection which was bargained and paid for. Were we to hold otherwise, we should in effect, by substituting a mere contract for indemnity for the bond which was made, be presenting the defendant surety company with an unearned windfall.

Since we find it necessary to remand, it seems advisable to say that we find no merit in the defendant's assertion, by way of defense, that is was injured by [650] the plaintiff's failure to pursue its right against the prime contractor under the Miller Act. If the plaintiff, when it furnished material, had a right against the prime contractor and his surety and also, as we hold, a right against the subcontractor and the defendant as its surety, we know of no principle of law which required the plaintiff first to exhaust its remedy against the prime contractor and its surety.

Reversed and remanded.

[1] The Miller Act, 40 U.S.C.A. § 270a provides:

"(a) Before any contract, exceeding $2,000 in amount, for the construction, alteration, or repair of any public building or public work of the United States is awarded to any person, such person shall furnish to the United States the following bonds, which shall become binding upon the award of the contract to such person, who is hereinafter designated as 'contractor':

"(1) A performance bond with a surety or sureties satisfactory to the officer awarding such contract, and in such amount as he shall deem adequate, for the protection of the United States.

"(2) A payment bond with a surety or sureties satisfactory to such officer for the protection of all persons supplying labor and material in the prosecution of the work provided for in said contract for the use of each such person."

Section 270b provides:

"(a) Every person who has furnished labor or material in the prosecution of the work provided for in such contract, in respect of which a payment bond is furnished under section 270a of this title and who has not been paid in full therefor before the expiration of a period of ninety days after the day on which the last of the labor was done or performed by him or material was furnished or supplied by him for which such claim is made, shall have the right to sue on such payment bond for the amount, or the balance thereof, unpaid at the time of institution of such suit and to prosecute said action to final execution and judgment for the sum or sums justly due him: Provided, however, That any person having direct contractual relationship with a subcontractor but no contractual relationship express or implied with the contractor furnishing said payment bond shall have a right of action upon the said payment bond upon giving written notice to said contractor within ninety days from the date on which such person did or performed the last of the labor or furnished or supplied the last of the material for which such claim is made, stating with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed."

[2] 4 Corbin on Contracts, pages 177-178.

"Words of 'condition' are not words of 'promise' in form; but in this class of cases it is sound policy to interpret the words liberally in favor of the third parties. In a majority of states, it is already done; and without question the surety's rate of compensation for carrying the risk is sufficiently adjusted to the law. The compensated surety has become an institution that is well suited to carry the risk of the principal contractor's default, whereas individual laborers and materialmen are frequently very ill prepared to carry the risk. The legislatures have recognized this fact, and in the case of public contracts have required surety bonds to protect the third parties. While this has not been done in the case of private construction, and while the courts should not on their own motion put such a provision into a private surety bond, they may well interpret a bond that is expressly conditioned on the payment of laborers and materialmen as being a promise to pay them and made for their benefit. The words reasonably permit it, and social policy approves it. The court need not strain the words of the bond, as has sometimes been done, to hold that the third persons were not intended as beneficiaries thereof, even though the promisee may have been thinking chiefly of himself when he paid for the bond."

15 Cal.Rptr. 821
56 Cal.2d 583, 364 P.2d 685

Robert LUCAS et al., Plaintiffs and Appellants,
v.
L. S. HAMM, Defendant and Respondent.

S. F. 20269.
Supreme Court of California, In Bank.
Sept. 5, 1961.
Rehearing Denied Oct. 4, 1961.

[15 Cal.Rptr. 822] [364 P.2d 686] [56 Cal.2d 586] Reginald G. Hearn, San Francisco, for plaintiffs and appellants.

Philip H. Angell, Scott Elder, Robert M. Adams, Jr., Angell, Adams, Gochnauer & Elder and B. E. Kragen, San Francisco, for defendant and respondent.

GIBSON, Chief Justice.

Plaintiffs, who are some of the beneficiaries under the will of Eugene H. Emmick, deceased, brought this action for damages against defendant L. S. Hamm, an attorney at law who had been engaged by the testator to prepare the will. They have appealed from a judgment of dismissal entered after an order sustaining a general demurrer to the second amended complaint without leave to amend.

The allegations of the first and second causes of action are summarized as follows: Defendant agreed with the testator, for a consideration, to prepare a will and condicils thereto for him by which plaintiffs were to be designated as beneficiaries of a trust provided for by paragraph Eighth of the will and were to receive 15% of the residue as specified in that paragraph. Defendant, in violation of instructions and in breach of his contract, negligently prepared testamentary instruments containing phraseology that was invalid by virtue of section 715.2 and former sections 715.1 and 716 of the Civil Code relating to restraints on alienation and the rule against perpetuities.^[1] Paragraph Eighth of these instruments [15 Cal.Rptr. 823] [364 P.2d 687] [56 Cal.2d 587] "transmitted" the residual estate in trust and provided that the "trust shall cease and terminate at 12 o'clock noon on a day five years after the date upon which the order distributing the trust property to the trustee is made by the Court having jurisdiction over thr probation of this will." After the death of the testator the instruments were admitted to probate. Subsequently defendant, as draftsman of the instruments and as counsel of record for the executors, advised plaintiffs in writing that the residual trust provision was invalid and that plaintiffs would be deprived of the entire amount to which they would have been entitled if the provision had been valid unless they made a settlement with the blood relatives of the testator under which plaintiffs would receive a lesser amount than that provided for them by the testator. As the direct and proximate result of the negligence of defendant and his breach of contract in preparing the testamentary instruments and the written advice referred to above, plaintiffs were compelled to enter into a settlement under which they received a share of the estate amounting to $75,000 less than the sum which they would have received pursuant to testamentary instruments drafted in accordance with the directions of the testator.

(The third cause of action will be discussed separarately because it concerns matters not involved in the first two counts.)

[56 Cal.2d 588] It was held in Buckley v. Gray, 110 Cal. 339, 42 P. 900, 31 L.R.A. 862, that an attorney who made a mistake in drafting a will was not liable for negligence or breach of contract to a person named in the will who was deprived of benefits as a result of the error. The court stated that an attorney is liable to his client alone with respect to actions based on negligence in the conduct of his professional duties, and it was reasoned that there could be no recovery for mere negligence where there was no privity by contract or otherwise between the defendant and the person injured. 110 Cal. at pages 342-343, 42 P. 900. The court further concluded that there could be no recovery on the theory of a contract for the benefit of a third person, because the contract with the attorney was not expressly for the plaintiff's benefit and the testatrix only remotely intended the plaintiff to be benefited as a result of the contract. 110 Cal. at pages 346-347, 42 P. 900. For the reasons hereinafter stated the case is overruled.

The reasoning underlying the denial of tort liability in the Buckley case, i. e., the stringent privity test, was rejected in Biakanja v. Irving, 49 Cal.2d 647, 648-650, 320 P.2d 16, 65 A.L.R.2d 1358, where we held that a notary public who, although not authorized to practice law, prepared a will but negligently failed to direct proper attestation was liable in tort to an intended beneficiary who was damaged because of the invalidity of the instrument. It was pointed out that since 1895, when Buckley was decided, the rule that in the absence of privity there was no liability for negligence committed in the performance of a contract had been greatly liberalized. 49 Cal.2d at page 649, 320 P.2d 16. In restating the rule it was said that the determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury, and the policy of preventing future harm. 49 Cal.2d at page 650, 320 P.2d 16. The same general principle must be applied in determining whether a beneficiary [15 Cal.Rptr. 824] [364 P.2d 688] is entitled to bring an action for negligence in the drafting of a will when the instrument is drafted by an attorney rather than by a person not authorized to practice law.

Many of the factors which led to the conclusion that the notary public involved in Biakanja was liable are equally [56 Cal.2d 589] applicable here. As in Biakanja, one of the main purposes which the transaction between defendant and the testator intended to accomplish was to provide for the transfer of property to plaintiffs; the damage to plaintiffs in the event of invalidity of the bequest was clearly foreseeable; it became certain, upon the death of the testator without change of the will, that plaintiffs would have received the intended benefits but for the asserted negligence of defendant; and if persons such as plaintiffs are not permitted to recover for the loss resulting from negligence of the draftsman, no one would be able to do so, and the policy of prevent future harm would be impaired.

Since defendant was authorized to practice the profession of an attorney, we must consider an additional factor not present in Biakanja, namely, whether the recognition of liability to beneficiaries of wills negligently drawn by attorneys would impose an undue burden on the profession. Although in some situations liability could be large and unpredictable in amount, this is also true of an attorney's liability to his client. We are of the view that the extension of his liability to beneficiaries injured by a negligently drawn will does not place an undue burden on the profession, particularly when we take into consideration that a contrary conclusion would cause the innocent beneficiary to bear the loss. The fact that the notary public involved in Biakanja was guilty of unauthorized practice of the law was only a minor factor in determining that he was liable, and the absence of the factor in the present case does not justify reaching a different result.

It follows that the lack of privity between plaintiffs and defendant does not preclude plaintiffs from maintaining an action in tort against defendant.

Neither do we agree with the holding in Buckley that beneficiaries damaged by an error in the drafting of a will cannot recover from the draftsman on the theory that they are third-party beneficiaries of the contract between him and the testator.^[2] Obviously the main purpose of a contract [56 Cal.2d 590] for the drafting of a will is to accomplish the future transfer of the estate of the testator to the beneficiaries named in the will, and therefore it seems improper to hold, as was done in Buckley, that the testator intended only "remotely" to benefit those persons. It is true that under a contract for the benefit of a third person performance is usually to be rendered directly to the beneficiary, but this is not necessarily the case. (See Rest., Contracts, § 133, com. d; 2 Williston on Contracts (3rd ed.1959) 829.) For example, where a life insurance policy lapsed because a bank failed to perform its agreement to pay the premiums out of the insured's bank account, it was held that after the insured's death the beneficiaries could recover against the bank as third-party beneficiaries. Walker Bank & Trust Co. v. First Security Corp., 9 Utah 2d 215, 341 P.2d 944, 945 et seq. Persons who had agreed to procure liability insurance for the protection of the promisees but did not do so were also held liable to injured persons who would have been covered by the insurance, the courts stating that all persons who might be injured were third-party beneficiaries of the contracts to procure insurance. [15 Cal.Rptr. 825] [364 P.2d 689] Johnson v. Holmes Tuttle Lincoln-Merc., Inc., 160 Cal.App.2d 290, 296 et seq., 325 P.2d 193; James Stewart & Co. v. Law, 149 Tex. 392, 233 S.W.2d 558, 561-562, 22 A.L.R.2d 639. Since, in a situation like those presented here and in the Buckley case, the main purpose of the testator in making his agreement with the attorney is to benefit the persons named in his will and this intent can be effectuated, in the event of a breach by the attorney, only by giving the beneficiaries a right of action, we should recognize, as a matter of policy, that they are entitled to recover as third-party beneficiaries. See 2 Williston on Contracts (3rd ed. 1959) pp. 843-844; 4 Corbin on Contracts (1951) pp. 8, 20.

Section 1559 of the Civil Code, which provides for enforcement by a third person of a contract made "expressly" for his benefit, does not preclude this result. The effect of the section is to exclude enforcement by persons who are only incidentally or remotely benefited. See Hartman Ranch Co. v. Associated Oil Co., 10 Cal.2d 232, 244, 73 P.2d 1163; cf. 4 Corbin on Contracts (1951) pp. 23-24. As we have seen, a contract for the drafting of a will unmistakably shows the intent of the testator to benefit the persons to be named in the will, and the attorney must necessarily understand this.

Defendant relies on language in Smith v. Anglo- [56 Cal.2d 591] California Trust Co., 205 Cal. 496, 502, 271 P. 898, and Fruitvale Canning Co. v. Cotton, 115 Cal.App.2d 622, 625, 252 P.2d 953, that to permit a third person to bring an action on a contract there must be "an intent clearly manifested by the promisor" to secure some benefit to the third person. This language, which was not necessary to the decision in either of the cases, is unfortunate. Insofar as intent to benefit a third person is important in determining his right to bring an action under a contract, it is sufficient that the promisor must have understood that the promisee had such intent. (Cf. Rest., Contracts, § 133, subds. 1(a) and 1(b); 4 Corbin on Contracts (1951) pp. 16-18; 2 Williston on Contracts (3rd ed. 1959) pp. 836-839). No specific manifestation by the promisor of an intent to benefit the third person is required. The language relied on by defendant is disapproved to the extent that it is inconsistent with these views.

We conclude that intended beneficiaries of a will who lose their testamentary rights because of failure of the attorney who drew the will to properly fulfill his obligations under his contract with the testator may recover as third-party beneficiaries.

However, an attorney is not liable either to his client or to a beneficiary under a will for errors of the kind alleged in the first and second causes of action.

The general rule with respect to the liability of an attorney for failure to properly perform his duties to his client is that the attorney, by accepting employment to give legal advice or to render other legal services, impliedly agrees to use such skill, prudence, and diligence as lawyers of ordinary skill and capacity commonly possess and exercise in the performance of the tasks which they undertake. Estate of Kruger, 130 Cal. 621, 626, 63 P. 31; Moser v. Western Harness Racing Ass'n, 89 Cal.App.2d 1, 7, 200 P.2d 7; Armstrong v. Adams, 102 Cal.App. 677, 684, 283 P. 871; see Wade, The Attorney's Liability for Negligence (1959) 12 Vanderbilt Law Rev. 755, 762-765; 5 Am.Jur. 336. The attorney is not liable for efery mistake he may make in his practice; he is not, in the absence of an express agreement, an insurer of the soundness of his opinions or of the validity of an instrument that he is engaged to draft; and he is not liable for being in error as to a question of law on which reasonable doubt may be entertained by well-informed lawyers. See Lally v. Kuster, 177 Cal. 783, 786, 171 P. 961; Savings Bank v. Ward, 100 U.S. 195, 198, 25 L.Ed. 621; [56 Cal.2d 592] 5 Am.Jur. 335; 7 C.J.S. Attorney and Client § 143, p. 980. These principles are equally applicable whether the plaintiff's claim is based on tort or breach of contract.

[364 P.2d 690] [15 Cal.Rptr. 826] The complaint, as we have seen, alleges that defendant drafted the will in such a manner that the trust was invalid because it violated the rules relating to perpetuities and restraints on alienation. These closely akin subjects have long perplexed the courts and the bar. Professor Gray, a leading authority in the field, stated:

"There is something in the subject which seems to facilitate error. Perhaps it is because the mode of reasoning is unlike that with which lawyers are most familiar. * * * A long list might be formed of the demonstrable blunders with regard to its questions made by eminent men, blunders which they themselves have been sometimes the first to acknowledge; and there are few lawyers of any practice in drawing wills and settlements who have not at some time either fallen into the net which the Rule spreads for the unwary, or at least shuddered to think how narrowly they have escaped it."

Gray, The Rule Against Perpetuities (4th ed. 1942) p. xi; see also Leach, Perpetuities Legislation (1954) 67 Harv.L.Rev. 1349 (describing the rule as a "technicality-ridden legal nightmare" and a "dangerous instrumentality in the hands of most members of the bar"). Of the California law on perpetuities and restraints it has been said that few, if any, areas of the law have been fraught with more confusion or concealed more traps for the unwary draftsman; that members of the bar, probate courts, and title insurance companies make errors in these matters; that the code provisions adopted in 1872 created a situation worse than if the matter had been left to the common law, and that the legislation adopted in 1951 (under which the will involved here was drawn), despite the best of intentions, added rurther complexities. (See 38 Cal.Jur.2d 443; Coil, Perpetuities and Restraints; A Needed Reform (1955) 30 State Bar J. 87, 88-90.)

In view of the state of the law relating to perpetutities and restraints on alienation and the nature of the error, if any, assertedly made by defendant in preparing the instrument, it would not be proper to hold that defendant failed to use such skill, prudence, and diligence as lawyers of ordinary skill and capacity commonly exercise. The provision of the will quoted in the complaint, namely, that the trust was to terminate five years after the order of the probate court distributing the property to the trustee, could cause the trust to be [56 Cal.2d 593] invalid only because of the remote possibility that the order of distribution would be delayed for a period longer than a life in being at the creation of the interest plus 16 years (the 21-year statutory period less the five years specified in the will). Although it has been held that a possibility of this type could result in invalidity of a bequest (Estate of Johnston, 47 Cal.2d 265, 269-270, 303 P.2d 1; Estate of Campbell, 28 Cal.App.2d 102, 103 et seq., 82 P.2d 22), the possible occurrence of such a delay was so remote and unlikely that an attorney of ordinary skill acting under the same circumstances might well have "fallen into the net which the Rule spreads for the unwary" and failed to recognize the danger. We need not decide whether the trust provision of the will was actually invalid or whether, as defendant asserts, the complaint fails to allege facts necessary to enable such a determination,^[3] because we have concluded that in any event an error of the type relied on by plaintiffs does not show negligence or breach of constract on the part of defendant. It is apparent that plaintiffs have not stated and cannot state causes of action with respect to the first two counts, and the trial court did not [15 Cal.Rptr. 827] [364 P.2d 691] abuse its discretion in denying leave to amend as to these counts.

The third cause of action contains additional allegations as follows: After admission of the will and codicils to probate, Harold Houghton Emmick, Walton Russell Emmick, Clelta Inez Spelman, and Retha Newell, hereinafter called the contestants, instituted a will contest. The executors, defendant, and the contestants tentatively reached a settlement agreement, subject to court approval, under which $10,000 would be paid to the contestants from the assets of the estate in return for which each contestant would sign an "appropriate release." Defendant was negligent in the performance of his duties in that he caused to be executed on behalf of the estate and those interested therein, including plaintiffs, releases which did not precluded the contrestants from a subsequent attack upon the validity of the testamentary instruments. After complete execution of the releases and their transmittal to escrow but before approval of the compromise [56 Cal.2d 594] by the court, defendant was advised by competent counsel that the residual clause of the will and codicils was invalid as a violation of the rule against perpetuities and that as a consequence the phraseology of the releases was inadequate to protect the estate and persons interested therein, and defendant was requested by competent counsel to modify the releases and insert appropriate language suggested by counsel under which the contestants would release the estate and persons interested in it from any claims of whatsoever kind or nature. Defendant refused to do so and also refused to call the court's attention to the recommendations. As a consequence of the failure to direct the matter to the attention of the court, the order approving the compromise was made on the assumption that the releases would give adequate protection. The sum of $10,000 was paid to the contestants from the assets of the estate, and the releases were filed in the proceedings. Subsequently the contestants joined in a legal attack upon the validity of the residual clause of the will and codicils and by virtue of the invalidity of the clause participated in the settlement referred to above concerning paragraph Eighth of the will. If the releases had been prepared in accord with good legal practice they would have precluded such participation, with the result that plaintiffs would have received an additional sum of $15,000 from the estate.

This cause of action, unlike the first two, does not concern defendant's conduct as attorney for the testator, but, rather, asserted negligence by him when acting as attorney for the executors with respect to the execution of releases in the settlement of a will contest based on lack of testamentary capacity. It is undisputed that the releases were adequate to preclude any further litigation of that contest, but plaintiffs assert that defendant had a duty to obtain releases which, in addition, would waive all other claims of the contestants against the estate and prevent them from subsequently attacking the validity of the trust provisions.

There are no allegations that the contestants, either at the time of the negotiations for the settlement or at the time of the signing of the releases, were willing to waive their rights to make other attacks upon the will after the settlement of that contest. In the absence of additional allegations we must assume that the agreed sum of $10,000 was intended solely for the settlement of the contest and the ground on which it was based, i. e., lack of testamentary capacity, and it would ordinarily be expected that the contestants would have demanded [56 Cal.2d 595] an additional sum for a more extensive waiver terminating their rights to attack the validity of the various provisions of the will. The written releases, of course, were required to conform to the settlement agreement. Under these circumstances it could well be argued that the attorneys for the contestants would have been derelict in their duty to their clients if they had approved broader releases. At most, under the allegations, defendant had a duty to request [15 Cal.Rptr. 828] [364 P.2d 692] that the contestants sign broader releases, but there is no allegation that he failed to ask them to do so. The third count does not state a cause of action for negligence.

Although defendant pointed out in both the trial court and this court that there is no allegation that he could have secured releases different from the ones given, plaintiffs make no claim that they can amend their complaint so as to cure the deficiency, and we cannot properly hold that the trial court abused its discretion in denying leave to amend.

The judgment is affirmed.

TRAYNOR, SCHAUER, McCOMB, PETERS, WHITE and DOOLING, JJ., concur.

[1] Former section 715.1 of the Civil Code, as it read at the times involved here, provided:

"The absolute power of alienation cannot be suspended, by any limitation or condition whatever, for a period longer than 21 years after some life in being at the creation of the interest and any period of gestation involved in the situation to which the limitation applies. The lives selected to govern the time of suspension must not be so numerous or so situated that evidence of thir deaths is likely to be unreasonaly difficult to obtain."

Section 715.2 reads as follows:

"No interest in real or personal property shall be good unless it must vest, if at all, not later than 21 years after some life in being at the creation of the interest and any period of gestation involved in the situation to which the limitation applies. The lives selected to govern the time of vesting must not be so numerous or so situated that evidence of their deaths is likely to be unreasonably difficult to obtain. It is intended by the enactment of this section to make effective in this State the American common-law rule against perpetuities."

Former section 716, as it read at the times involved here, provided:

"Every future interest is void in its creation which, by any posssibility, may suspend the absolute power of alienation for a longer period than in prescribed in this chapter. Such power of alienation is suspended when there are no persons in being by whom an absolute interest in possession can be conveyed. The period of time during which an interest is destructible pursuant to the uncontrolled volition and for the exclusive personal benefit of the person having such a power of destruction is not to be included in determining the existence of a suspension of the absolute power of alienation or the permissible period for the vesting of an interest within the rule against perpetuities."

[2] It has been recognized in other jurisdictions that the client may recover in a contract action for failure of the attorney to carry out his agreement. (See 5 Am.Jur. 331; 49 A.L.R.2d 1216, 1219-1221; Prosser, Selected Topics on the Law of Torts (1954) pp. 438, 422.) This is in accord with the general rule stated in Communale v. Traders & General Ins. Co., 50 Cal.2d 654, 663, 328 P.2d 198, 68 A.L.R.2d 883, that where a case sounds in both tort and contract, the plaintiff will ordinarily have freedom of election between the two actions.

[3] Defendant asserts that a provision of a will like the one quoted in the complaint could not cause a trust to be invalid unless it also appeared that there were contingent interests which could not vest within the statutory time or that the trust could not be terminated by the beneficiaries acting together within the statutory period. See Estate of Phelps, 182 Cal. 752, 759-760, 190 P. 17; Estate of Heberle, 155 Cal. 723, 726-727, 102 P. 935; Rest., Trusts, Second, § 337.

204 F.2d 495 (1953)

ISBRANDTSEN CO., Inc.
v.
LOCAL 1291 OF INTERNATIONAL LONGSHOREMEN'S ASS'N.

No. 10896.
United States Court of Appeals Third Circuit.
Argued April 7, 1953.
Decided May 7, 1953.

Samuel B. Fortenbaugh, Jr., Philadelphia, Pa. (Clark, Ladner, Fortenbaugh & Young, Philadelphia, Pa., Hunt, Hill & Betts, New York City, on the brief), for appellant.

Abraham E. Freedman, Philadelphia, Pa. (Freedman, Landy & Lorry, Philadelphia, Pa., on the brief), for appellee.

Before MARIS, GOODRICH and McLAUGHLIN, Circuit Judges.

GOODRICH, Circuit Judge.

This case involves a suit on a contract by one not a party to it. Action was brought in the district court, and that court, upon motion by the defendant, dismissed the case under rule 12(b), F.R.C.P. 28 U.S.C.^[1] We proceed, as did the district court, on the assumption that all statements of fact alleged are true.

[496] Here are the facts. Isbrandtsen Company, Inc., was the time charterer of a ship called the "Nyco." Isbrandtsen in turn chartered the ship to the Scott Paper Company for the purpose of transporting pulp from Nova Scotia to Philadelphia. Under the terms of the charter Scott Paper Company was to load and unload the vessel. Scott in turn hired Lavino Shipping Company to do the unloading. When the vessel got to its destination the employees of Lavino started to unload it, and during the unloading stopped work contrary to the provisions of the contract which their union had made with their employer. More needs to be said about that contract. The parties to it were the Philadelphia Marine Trade Association, of which Lavino Shipping Company was a member, "as collective bargaining agent for those of its members who employ longshoremen", and Local 1291 of the International Longshoremen's Association. The contract provided among other things that there was to be no work stoppage pending arbitration of disputes which might arise. Isbrandtsen, alleging that the delay in unloading the ship caused it damage, sued under Section 301(a) of the Labor Management Relations Act of 1947.^[2] Alternatively it claimed, there being diversity of citizenship and the requisite jurisdictional amount, to be able to recover as a matter of common law.

Local 1291 has made the point that the provision of the Labor Management Relations Act gives no right to sue to anyone except employer and employee. The statute does not, however, so state. It says:

"Suits for violation of contracts between an employer and a labor organization representing employees in an industry affecting commerce as defined in this chapter, or between any such labor organizations, may be brought in any district court of the United States having jurisdiction of the parties, without respect to the amount in controversy or without regard to the citizenship of the parties." 29 U.S.C.A. § 185(a).

All the statute talks about is a suit for violation of the contract; it does not say who may or who may not sue. The legislative history cited by the appellee is certainly inconclusive with regard to the rights of those not signatory to the contract, and a point of view contrary to appellee's argument seems to be indicated by the decision in Marranzano v. Riggs National Bank, 1950, 87 U.S.App.D.C. 195, 184 F.2d 349.^[3] We need not decide this point, however.

We may assume that § 301(a) does not impose any limitations upon the persons who may sue. Our question then becomes, is Isbrandtsen to be included as one who may sue for damages suffered by breach of this contract?

It may aid in understanding the problem if it is kept in mind just how far away Isbrandtsen stands from the actual parties to the contract. Signatories were, as said above, Philadelphia Marine Trade Association and Local 1291. Lavino Shipping Company is a member of that Association. Scott made its contract for unloading the vessel with Lavino. Scott in turn chartered this vessel from Isbrandtsen. Isbrandtsen is, then, three steps away from the contracting party.

The question of determining what rights one who is not a party to a contract has in its performance is one which is not free from difficulty. As Professor Williston points out, the first recognition of such rights was in the cases now called the donee beneficiary type.^[4] Here the courts protected the interest of the person for whose benefit the performance was intended to prevent a failure of justice. [497] The party to the contract would have no action for its breach except for nominal damages since he was not the one who suffered by the promisor's default. If the beneficiary could not sue there could be no adequate recovery even though the breach was established. The next extension was made, with hesitancy on the part of some courts, to the creditor beneficiary situation. "[T]hrough this travail," in Mr. Williston's words, "the common law has given birth to a distinct, new principle of law which takes its own place in the family of legal principles, and gives not only to a donee beneficiary, but also to a creditor beneficiary, the right to enforce directly the promise from which he derives his interest."^[5]

So we have the classification of donee beneficiary, creditor beneficiary and incidental beneficiary, a classification discussed in the works of both Williston and Corbin and used in the Restatement. As Mr. Corbin says, the description of the term "incidental beneficiary" to describe one "whose relation to the contracting parties is such that the courts will not recognize any legal right in him" is not particularly helpful "for the problem of the courts is to determine what kinds of claimants asserting themselves to be beneficiaries have rights and what kinds have not."^[6]

Corbin goes on to describe what constitutes a creditor beneficiary and what constitutes a donee beneficiary.^[7] He says:

"If in buying the promise the promisee expresses an intent that some third party shall receive either the security of the executory promise or the benefit of performance as a gift, that party is a donee of either the contract right or of the promised performance or both. If, on the other hand, the promisee's expressed intent is that some third party shall receive the performance in satisfaction and discharge of some actual or supposed duty or liability of the promisee, the third party is a creditor beneficiary. All others who may in some way be benefited by performance have no rights and are called incidental beneficiaries."^[8]

We see no possibility that Isbrandtsen can be a creditor beneficiary of this labor union. The labor union was a complete stranger to Isbrandtsen so far as this transaction is concerned. Neither owed the other anything. And, therefore, there was no obligation on the part of either to do anything to or for the other.^[9] Nor do we see any possibility of making out of this situation a donee beneficiary relationship. This is not like a contract where a father buys an insurance policy to build up an estate for his son.^[10] It was a labor contract made between this association and a union. The contract recited that the association was acting on behalf of its members who employ longshoremen. Lavino is one of those members. But it does not appear that either Scott or Isbrandtsen was a member, and there is no allegation that either one employed longshoremen.

There is considerable language in the Restatement and in the cases and decisions about "intent" and "accompanying circumstances."^[11] From that the argument is made to us that the court should not have [498] dismissed under Rule 12 but should have heard the plaintiff upon an attempt to make a showing of the supposed intention of the parties with regard to persons to benefit by this contract.^[12]

But we think that the whole setting of this fact situation as described in the complaint and exhibits is one which completely negatives a gift transaction under any possible interpretation of that term. The contract between the association and the labor union was a usual type of collective bargaining agreement. The contract between Isbrandtsen and Scott was a charter party in the ordinary form made upon stated money consideration. We do not have before us a copy of the contract between Scott and Lavino, but the complaint describes it as an agreement whereby Lavino promised Scott to discharge a cargo of wood pulp from the vessel. We cannot think that Lavino was making a gift to Scott or that Scott was making a gift to Isbrandtsen. In other words, all the transactions were usual business transactions in which parties were agreeing to do things for and pay money to each other.

We do not think, therefore, that in view of this business setting any statement by the marine association that it intended its agreement with the labor union to benefit all the world who might be helped by the faithful performance of the contract would give these remote parties rights against one who broke it.^[13] It may well be that Isbrandtsen suffered a loss of use of its boat because a strike stopped the unloading of the Nyco. It also may be that the people who had cargo to ship on the next voyage lost a market by the delay. And it may be that the people who did not get the goods on the next voyage, on time, lost a profitable bargain on that account. But neither in contract nor in tort have duties been extended very far beyond the immediate parties to the facts out of which a cause of action is said to arise. If one induces another to break a contract with a third person that third person has a tort claim against the one who procured the breach. But while Lumley could sue Gye for inducing Miss Wagner not to sing for Lumley as she had promised, no one would, we think, allow an action for breach of contract on the part of all the disappointed opera goers who did not hear Miss Wagner, even though the ultimate effect of performance by Miss Wagner would have been to send them home with the pleased feeling of having heard something beautiful.^[14]

The question was thoughtfully considered by the district judge. He concluded that Isbrandtsen was but "an incidental beneficiary" and in this conclusion he was right. Isbrandtsen is too far away from this contract to be included either as a donee or a creditor beneficiary and it must be one or the other in order to sue for breach of an agreement to which it was not a party.

It may be an arguable question whether the underlying law here will be found in federal decisions, assuming that plaintiff bases his claim upon a federal statute and [499] comes within federal authority under the commerce power, or whether it is a question of Pennsylvania law by virtue of diversity of citizenship since the agreement and its breach took place in that state. That question need not be resolved. We think that Robins Dry Dock & Repair Company v. Flint, 1927, 275 U.S. 303, 48 S.Ct. 134, 72 L.Ed. 290, shows clearly that there could be no recovery under federal authority, and the same thing is true under the Pennsylvania decisions.^[15]

The judgment of the district court will be affirmed.

[1] The district court's opinion is reported in 107 F.Supp. 72.

[2] 29 U.S.C.A. § 185(a).

[3] But cf. MacKay v. Loew's, Inc., D.C.S.D. Cal., 1949, 84 F.Supp. 676, affirmed on other grounds, 9 Cir., 1950, 182 F.2d 170, certiorari denied 1950, 340 U.S. 828, 71 S. Ct. 65, 95 L.Ed. 608, rehearing denied 340 U.S. 885, 71 S.Ct. 194, 95 L.Ed. 643; Schatte v. International Alliance, etc., D.C.S.D.Cal.1949, 84 F.Supp. 669, affirmed on other grounds, 9 Cir., 1950, 182 F.2d 158, certiorari denied, 1950, 340 U. S. 827, 71 S.Ct. 64, 95 L.Ed. 608, rehearing denied 340 U.S. 885, 71 S.Ct. 194, 95 L.Ed. 643.

[4] 2 Williston on Contracts, § 357 (Rev. ed. 1936).

[5] Ibid. See also id. at § 361; 4 Corbin on Contracts 2-4, 28-31, 34-38 (1951).

[6] 4 Corbin on Contracts, § 779C (1951).

[7] The discussion of Corbin is in accord with the statements which appear in the Restatement of Contracts, §§ 133-147, and in 2 Williston on Contracts, §§ 356-361 (Rev. ed. 1936). Corbin's language is quoted because it is the most recent statement on the subject by an established authority.

[8] 4 Corbin on Contracts 41 (1951).

[9] For a discussion of this sort of contract see Corbin, op. cit. supra, § 779D. See also Restatement, Contracts, § 133 (1) (b), § 147.

[10] As in Fidelity-Philadelphia Trust Co. v. Bankers' Life Ins. Co., 1952, 370 Pa. 513, 88 A.2d 710.

[11] M. E. Smith & Co. v. Wilson, 8 Cir., 1925, 9 F.2d 51; In re Gubelman, 2 Cir., 1926, 13 F.2d 730, 48 A.L.R. 1037; Fidelity-Philadelphia Trust Co. v. Bankers' Life Ins. Co., supra note 10; Brill v. Brill, 1925, 282 Pa. 276, 127 A. 840; Note, 81 A.L.R. 1271. Williston, Corbin, and the Restatement make a distinction between donee and creditor beneficiaries in this regard; "intent to benefit" should be an operative factor only in the case of donee beneficiaries. Restatement, Contracts, § 133; Williston, op. cit. supra, § 356A; Corbin, op. cit. supra, §§ 776-777.

[12] Plaintiff relies on this Court's liberal interpretation of when a complaint states a cause of action. See, e.g., Continental Collieries v. Shober, 3 Cir., 1942, 130 F. 2d 631; Frederick Hart & Co. v. Record-graph Corp., 3 Cir., 1948, 169 F.2d 580.

[13] We are reinforced in this conclusion by the fact that the contract does not mention, or even allude to, any third party. While a third party need not be ascertained when the contract is made in order to acquire a right thereunder, Restatement, Contracts, § 139, we have found no case in which a right has been held to exist in a third party whose existence is not referred to in the contract. Cf. United States v. Huff, 5 Cir., 1948, 165 F.2d 720, 1 A.L.R.2d 854. It is the intention of the promisee which is said to govern, but there is no authority known to us which carries this principle to the extent of holding liable a promisor whose contemplation of a third party does not appear from the contract. See Williston, op. cit. supra, at p. 1045; Corbin, op. cit. supra, at p. 18. See note 15, infra.

[14] Lumley v. Gye, 2 E. & B. 216 (1853). In general, see Restatement, Torts, § 766 et seq.; Prosser on Torts, 972-1013 (1941 ed.).

[15] If anything, the current rule in Pennsylvania appears to be stricter, as shown in Spires v. Hanover Fire Ins. Co., 1950, 364 Pa. 52, 70 A.2d 828, where the present Chief Justice of Pennsylvania's Supreme Court denied recovery by an alleged third party beneficiary because the contract did not disclose that both the parties thereto intended to confer a right on him. At the very least the opinion supports the proposition that the promisor must have contemplated the existence of a third party before he can be held liable to him.

[*163] OPINION OF THE COURT

CARDOZO, Ch. J.

The defendant, a water works company under the laws of this State, made a contract with the city of Rensselaer for the supply of water during a term of years. Water was to be furnished to the city for sewer flushing and street sprinkling; for service to schools and public buildings; and for service at fire hydrants, the latter service at the rate of $42.50 a year for each hydrant. Water was to be furnished to private takers within the city at their homes and factories and other industries at reasonable rates, not exceeding a stated schedule. While this contract was in force, a building caught fire. The flames, spreading to the plaintiff's warehouse near by, destroyed it and its contents. The defendant according to the complaint was promptly notified of the fire, "but omitted and neglected after such notice, to supply or furnish sufficient or adequate quantity of water, with adequate pressure to stay, suppress or extinguish the fire before it reached the warehouse of the plaintiff, although the pressure and supply which the defendant was equipped to supply and furnish, and had agreed by said contract to supply and furnish, was adequate and sufficient to prevent the spread of the fire to and the destruction of the plaintiff's warehouse and its contents." By reason of the failure of the defendant to "fulfill the provisions of the contract between it and the city of Rensselaer," the plaintiff is said to have suffered damage, for which judgment is demanded. A motion, in the nature of a demurrer, to dismiss the complaint, was denied at Special Term. The Appellate Division reversed by a divided court.

Liability in the plaintiff's argument is placed on one or other of three grounds. The complaint, we are told, is to be viewed as stating: (1) A cause of action for breach of contract within Lawrence v. Fox (20 N. Y. 268); (2) a cause of action for a common-law tort, within Mac Pherson v. Buick Motor Company (217 N. Y. 382); or (3) a cause of action for the breach of a statutory duty. These several grounds of liability will be considered in succession. [*164]

(1) We think the action is not maintainable as one for breach of contract.

No legal duty rests upon a city to supply its inhabitants with protection against fire (Springfield Fire Ins. Co. v. Village of Keeseville, 148 N. Y. 46). That being so, a member of the public may not maintain an action under Lawrence v. Fox against one contracting with the city to furnish water at the hydrants, unless an intention appears that the promisor is to be answerable to individual members of the public as well as to the city for any loss ensuing from the failure to fulfill the promise. No such intention is discernible here. On the contrary, the contract is significantly divided into two branches: one a promise to the city for the benefit of the city in its corporate capacity, in which branch is included the service at the hydrants; and the other a promise to the city for the benefit of private takers, in which branch is included the service at their homes and factories. In a broad sense it is true that every city contract, not improvident or wasteful, is for the benefit of the public. More than this, however, must be shown to give a right of action to a member of the public not formally a party. The benefit, as it is sometimes said, must be one that is not merely incidental and secondary (cf. Fosmire v. Nat. Surety Co., 229 N. Y. 44). It must be primary and immediate in such a sense and to such a degree as to bespeak the assumption of a duty to make reparation directly to the individual members of the public if the benefit is lost. The field of obligation would be expanded beyond reasonable limits if less than this were to be demanded as a condition of liability. A promisor undertakes to supply fuel for heating a public building. He is not liable for breach of contract to a visitor who finds the building without fuel, and thus contracts a cold. The list of illustrations can be indefinitely extended. The carrier of the mails under contract with the government is not answerable to the merchant who has lost the benefit of a bargain through [*165] negligent delay. The householder is without a remedy against manufacturers of hose and engines, though prompt performance of their contracts would have stayed the ravages of fire. "The law does not spread its protection so far" (Robins Dry Dock & Repair Co. v. Flint, 275 U. S. 303).

So with the case at hand. By the vast preponderance of authority, a contract between a city and a water company to furnish water at the city hydrants has in view a benefit to the public that is incidental rather than immediate, an assumption of duty to the city and not to its inhabitants. Such is the ruling of the Supreme Court of the United States (German Alliance Ins. Co. v. Home Water Supply Co., 226 U. S. 220). Such has been the ruling in this State (Wainwright v. Queens County Water Co., 78 Hun, 146; Smith v. Great South Bay Water Co., 82 App. Div. 427), though the question is still open in this court. Such with few exceptions has been the ruling in other jurisdictions (Williston, Contracts, § 373, and cases there cited; Dillon, Municipal Corporations [5th ed.]., § 1340). The diligence of counsel has brought together decisions to that effect from twenty-six States. Typical examples are Alabama (Ellis v. Birmingham Water Co., 187 Ala. 552); California (Nichaus Bros. Co. v. Contra Costa Water Co., 159 Cal. 305); Georgia (Holloway v. Macon G. & W. Co., 132 Ga. 387); Connecticut (Nickerson v. Bridgeport H. Co., 46 Conn. 24); Kansas (Mott v. Cherryvale W. & M. Co., 48 Kan. 12); Maine (Hone v. Presque Isle Water Co., 104 Me. 217); New Jersey (Hall v. Passaic Water Co., 83 N. J. L. 771), and Ohio (Blunk v. Dennison Water Co., 71 Ohio St. 250). Only a few States have held otherwise (Page, Contracts, § 2401). An intention to assume an obligation of indefinite extension to every member of the public is seen to be the more improbable when we recall the crushing burden that the obligation would impose (cf. Hone v. Presque Isle Water Co., 104 Me. 217, at 232). The consequences invited would bear [*166] no reasonable proportion to those attached by law to defaults not greatly different. A wrongdoer who by negligence sets fire to a building is liable in damages to the owner where the fire has its origin, but not to other owners who are injured when it spreads. The rule in our State is settled to that effect, whether wisely or unwisely (Hoffman v. King, 160 N. Y. 618; Rose v. Penn. R. R. Co., 236 N. Y. 568; Moore v. Van Beuren & N. Y. Bill Posting Co., 240 N. Y. 673; cf. Bird v. St. Paul F. & M. Ins. Co., 224 N. Y. 47). If the plaintiff is to prevail, one who negligently omits to supply sufficient pressure to extinguish a fire started by another, assumes an obligation to pay the ensuing damage, though the whole city is laid low. A promisor will not be deemed to have had in mind the assumption of a risk so overwhelming for any trivial reward.

The cases that have applied the rule of Lawrence v. Fox to contracts made by a city for the benefit of the public are not at war with this conclusion. Through them all there runs as a unifying principle the presence of an intention to compensate the individual members of the public in the event of a default. For example, in Pond v. New Rochelle Water Co. (183 N. Y. 330) the contract with the city fixed a schedule of rates to be supplied not to public buildings but to private takers at their homes. In Matter of International Railway Co. v. Rann (224 N. Y. 83, 85) the contract was by street railroads to carry passengers for a stated fare. In Smyth v. City of N. Y. (203 N. Y. 106) and Rigney v. N. Y. C. & H. R. R. R. Co. (217 N. Y. 31) covenants were made by contractors upon public works, not merely to indemnify the city, but to assume its liabilities. These and like cases come within the third group stated in the comprehensive opinion in Seaver v. Ransom (224 N. Y. 233, 238). The municipality was contracting in behalf of its inhabitants by covenants intended to be enforced by any of them severally as occasion should arise. [*167]

(2) We think the action is not maintainable as one for a common-law tort.

"It is ancient learning that one who assumes to act, even though gratuitously, may thereby become subject to the duty of acting carefully, if he acts at all" (Glanzer v. Shepard, 233 N. Y. 236, 239; Marks v. Nambil Realty Co., Inc., 245 N. Y. 256, 258). The plaintiff would bring its case within the orbit of that principle. The hand once set to a task may not always be withdrawn with impunity though liability would fail if it had never been applied at all. A time-honored formula often phrases the distinction as one between misfeasance and non-feasance. Incomplete the formula is, and so at times misleading. Given a relation involving in its existence a duty of care irrespective of a contract, a tort may result as well from acts of omission as of commission in the fulfillment of the duty thus recognized by law (Pollock, Torts [12th ed.], p. 555; Kelley v. Met. Ry. Co., 1895, 1 Q. B. 944). What we need to know is not so much the conduct to be avoided when the relation and its attendant duty are established as existing. What we need to know is the conduct that engenders the relation. It is here that the formula, however incomplete, has its value and significance. If conduct has gone forward to such a stage that inaction would commonly result, not negatively merely in withholding a benefit, but positively or actively in working an injury, there exists a relation out of which arises a duty to go forward (Bohlen, Studies in the Law of Torts, p. 87). So the surgeon who operates without pay, is liable though his negligence is in the omission to sterilize his instruments (cf. Glanzer v. Shepard, supra); the engineer, though his fault is in the failure to shut off steam (Kelley v. Met. Ry. Co., supra; cf. Pittsfield Cottonwear Mfg. Co. v. Shoe Co., 71 N. H. 522, 529, 533); the maker of automobiles, at the suit of some one other than the buyer, though his negligence is merely in inadequate inspection (MacPherson [*168] v. Buick Motor Co., 217 N. Y. 382). The query always is whether the putative wrongdoer has advanced to such a point as to have launched a force or instrument of harm, or has stopped where inaction is at most a refusal to become an instrument for good (cf. Fowler v. Athens Waterworks Co., 83 Ga. 219, 222). The plaintiff would have us hold that the defendant, when once it entered upon the performance of its contract with the city, was brought into such a relation with every one who might potentially be benefited through the supply of water at the hydrants as to give to negligent performance, without reasonable notice of a refusal to continue, the quality of a tort. There is a suggestion of this thought in Guardian Trust Co. v. Fisher (200 U. S. 57), but the dictum was rejected in a later case decided by the same court (German Alliance Ins. Co. v. Home Water Supply Co., 226 U. S. 220) when an opportunity was at hand to turn it into law. We are satisfied that liability would be unduly and indeed indefinitely extended by this enlargement of the zone of duty. The dealer in coal who is to supply fuel for a shop must then answer to the customers if fuel is lacking. The manufacturer of goods, who enters upon the performance of his contract, must answer, in that view, not only to the buyer, but to those who to his knowledge are looking to the buyer for their own sources of supply. Every one making a promise having the quality of a contract will be under a duty to the promisee by virtue of the promise, but under another duty, apart from contract, to an indefinite number of potential beneficiaries when performance has begun. The assumption of one relation will mean the involuntary assumption of a series of new relations, inescapably hooked together. Again we may say in the words of the Supreme Court of the United States, "The law does not spread its protection so far" (Robins Dry Dock & Repair Co. v. Flint, supra; cf. Byrd v. English, 117 Ga. 191; Dale v. Grant, 34 N. J. L. 142; [*169] Conn. Ins. Co. v. N. Y. & N. H. R. R. Co., 25 Conn. 265; Anthony v. Slaid, 11 Metc. 290). We do not need to determine now what remedy, if any, there might be if the defendant had withheld the water or reduced the pressure with a malicious intent to do injury to the plaintiff or another. We put aside also the problem that would arise if there had been reckless and wanton indifference to consequences measured and foreseen. Difficulties would be present even then, but they need not now perplex us. What we are dealing with at this time is a mere negligent omission, unaccompanied by malice or other aggravating elements. The failure in such circumstances to furnish an adequate supply of water is at most the denial of a benefit. It is not the commission of a wrong.

(3) We think the action is not maintainable as one for the breach of a statutory duty.

The defendant, a public service corporation, is subject to the provisions of the Transportation Corporations Act. The duty imposed upon it by that act is in substance to furnish water, upon demand by the inhabitants, at reasonable rates, through suitable connections at office, factory or dwelling, and to furnish water at like rates through hydrants or in public buildings upon demand by the city, all according to its capacity (Transportation Corporations Law [[Cons. Laws, ch. 63], § 81; Staten Island Water Supply Co., v. City of N. Y., 144 App. Div. 318; People ex rel. City of N. Y. v. Queens Co. Water Co., 232 N. Y. 277; People ex rel. Arthur v. Huntington Water Works Co., 208 App. Div. 807, 808). We find nothing in these requirements to enlarge the zone of liability where an inhabitant of the city suffers indirect or incidental damage through deficient pressure at the hydrants. The breach of duty in any case is to the one to whom service is denied at the time and at the place where service to such one is due. The denial, though wrongful, is unavailing without more to give a cause of action to another. We may find a helpful analogy in the law of common carriers. [*170] A railroad company is under a duty to supply reasonable facilities for carriage at reasonable rates. It is liable, generally speaking, for breach of a duty imposed by law if it refuses to accept merchandise tendered by a shipper. The fact that its duty is of this character does not make it liable to some one else who may be counting upon the prompt delivery of the merchandise to save him from loss in going forward with his work. If the defendant may not be held for a tort at common law, we find no adequate reason for a holding that it may be held under the statute.

The judgment should be affirmed with costs.

POUND, CRANE, ANDREWS, LEHMAN and KELLOGG, JJ., concur; O'BRIEN, J., not sitting.

Judgment affirmed, etc.

113 Cal.Rptr. 585
11 Cal.3d 394, 521 P.2d 841

Ignacio MARTINEZ et al., Plaintiffs and Appellants,
v.
SOCOMA COMPANIES, INC., et al., Defendants and Respondents.

L.A. 29985.
Supreme Court of California,
In Bank.
May 1, 1974.

[11 Cal.3d 397] [113 Cal.Rptr. 586] [521 P.2d 842] Richard N. Fisher, Frank G. Ker and Brent N. Rushforth, Los Angeles, for plaintiffs and appellants.

Buchalter, Nemer, Fields & Savitch, Earl P. Willens, Richard D. Bronner, Los Angeles, Caditz & Grant and M. Alfred Karlsen, Beverly Hills, for defendants and respondents.

WRIGHT, Chief Justice.

Plaintiffs brought this class action on behalf of themselves and other disadvantaged unemployed persons, alleging that [113 Cal.Rptr. 587] [521 P.2d 843] 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 clearly intended not as gifts from the government to such persons but as a means of executing the public purposes stated in the contracts and [11 Cal.3d 398] in the underlying legislation. accordingly, plaintiffs were only incidental beneficiaries and as such have no right of recovery.

The complaint names as defendants Socoma Companies, Inc. ("Socoma"), 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 income 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 provided for the lease of different space in the building and for the manufacture of a 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.

[11 Cal.3d 399] Plaintiffs were allegedly members of a class of no more than 2,017 East Los Angeles residents who were certified as disadvantaged and were qualified for employment [113 Cal.Rptr. 588] [521 P.2d 844] under the contracts. Although the Government paid $712,500 of the contractual consideration to Socoma, $299,700 to Lady Fair, and $240,000 to Monarch, all of these defendants failed to perform under their respective contracts, except that Socoma provided 186 jobs of which 139 were wrongfully terminated, and Lady Fair provided 90 jobs, of which all were wrongfully terminated.

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.^[1]

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) 2 Cal.3d 493, 496, 86 Cal.Rptr. 88, 468 P.2d 216), but did not admit allegations which constitute conclusions of law (Faulkner v. Cal. Toll Bridge Authority (1953) 40 Cal.2d 317, 329, 253 P.2d 659) or which are contrary to matters of which we must take judicial notice (Chavez v. Times-Mirror Co. (1921) 185 Cal. 20, 23, 195 P. 666). (See Witkin, Cal.Procedure (2d ed. 1970) [11 Cal.3d 400] Pleading, §§ 328, 800.) When a complaint is based on a written contract which it sets out in full, a general demurrer to the complaint admits not only the contents of the instrument but also an pleaded meaning to which the instrument is reasonably susceptible. (Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 315, 38 Cal.Rptr. 505, 392 P.2d 265.) Moreover, where, as here, the general demurrer is to an Original complaint and is sustained without leave to amend, "the issues presented are whether the complaint states a cause of action, and if not, whether there is a reasonable possibility that it could be amended to do so." (MacLeod v. Tribune Publishing Co. (1959) 52 Cal.2d 536, 542, 343 P.2d 36, 38; see 3 Witkin, Cal.Procedure (2d ed. 1971) Pleading, § 845.) Thus, we must determine whether the pleaded written contracts support plaintiffs' claim either on their face or under any interpretation to which the contracts are reasonably susceptible and which is pleaded in the complaint or could be pleaded by proper amendment. This determination must be made in light of applicable federal statutes and other matters we must judicially notice. (Evic.Code, §§ 451, 459, subd. (a).)

Plaintiffs contend they are third party beneficiaries under Civil Code section 1559, which provides: "A contract, 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 [113 Cal.Rptr. 589] [521 P.2d 845] who are only incidentally or remotely benefited by it. (Lucas v. Hamm (1961) 56 Cal.2d 583, 590, 15 Cal.Rptr. 821, 824, 364 P.2d 685, 688.) American law generally classifies persons having enforceable rights under contracts to which they are not parties as either creditor beneficiaries or donee beneficiaries. (Rest., Contracts, §§ 133, subds. (1), (2), 135, 136, 147; 2 Williston on Contracts (3d ed. 1959) § 356; 4 Corbin on Contracts (1951) § 774; see Rest.2d Contracts (Tentative Drafts 1973) § 133, coms. b, c.) California decisions follow this classification. (Southern Cal. Gas Co. v. ABC Construction Co. (1962) 204 Cal.App.2d 747, 752, 22 Cal.Rptr. 540; 1 Witkin, Summary of Cal.Law (8th ed. 1973) Contracts, § 500.)

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) 10 Cal.2d 232, 244, 73 P.2d 1163; Rest., Contracts, § 133, subd. (1)(b).) Clearly the Government (the promisee) at no time bore and legal duty toward plaintiffs to provide the benefits set forth in the contracts and plaintiffs do not claim to be creditor beneficiaries.

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 [11 Cal.3d 401] the promisor. (Rest., Contracts, § 133, subd. (1)(a).) If the promisee intends to make a gift, the donee beneficiary can recover if such donative intent must have been understood by the promisor from the nature of the contract and the circumstances accompanying its execution. (Lucas v. Hamm, supra, 56 Cal.2d at pp. 590-591, 15 Cal.Rptr. 821, 364 P.2d 685.) This rule does not aid plaintiffs, however, because, as will be seen, no intention to make a gift can be imputed to the Government as promisee.

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) 301 U.S. 619, 640-645, 57 S.Ct. 904, 81 L.Ed. 1307.) The benefits of such programs are provided not simply as gifts to the recipients but as a means of accomplishing a larger public purpose. The furtherance of the public purpose is in the nature of consideration to the Government, displacing any governmental intent to furnish the benefits as gifts. (See County of Alameda v. Janssen (1940) 16 Cal.2d 276, 281, 106 P.2d 11; Allied Architects v. Payne (1923) 192 Cal. 431, 438-439, 221 P. 209.)

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. (1)(a) (italics supplied); Gourmet Lane, Inc. v. Keller (1963) 222 Cal.App.2d 701, 705, 35 Cal.Rptr. 398.) The Government may, of course, deliberately implement a public purpose by including provisions in its contracts which expressly confer on a specified class of third persons a direct right to benefits, or damages in lieu of benefits, against the private contractor. But a governmental intent to confer such a direct right cannot be inferred simply from the fact that the third persons were intended to enjoy the benefits. The Restatement of Contracts makes this clear in dealing specifically with contractual promises to the Government to render services to mem [113 Cal.Rptr. 590] bers [521 P.2d 846] of the public:

"A promisor [11 Cal.3d 402] bound to the United States or to a State or municipality by contract to do an act or render a service to some or all of the members of the public, Is subject to no duty under the contract to such members to give compensation for the injurious consequences of performing or attempting to perform it, or of failing to do so, unless, . . . An intention is manifested in the contract, as interpreted in the light of the circumstances surrounding its formation, That the promisor shall compensate members of the public for such injurious consequences. . . ." (Rest., Contracts, § 145 (italics supplied);^[2] see City & County of San Francisco v. Western Air Lines, Inc. (1962) 204 Cal.App.2d 105, 121, 22 Cal.Rptr. 216.)

The present contracts 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 undermined 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 number [11 Cal.3d 403] of jobs agreed to be provided. This liquidated damages provision limits liability for the breaches alleged by plaintiffs to the refunding of amounts received and indicates an absence of any contractual intent to impose liability directly in favor of plaintiffs, or, as claimed in the complaint, to impose liability for the value of the promised performance. To allow plaintiffs' claim would nullify the limited liability for which defendants bargained and which the Government may well have held out as an inducement in negotiating the contracts.^[3]

[113 Cal.Rptr. 591] [521 P.2d 847] 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) 126 Cal.App.2d 279, 272 P.2d 82, relied on by plaintiffs. The defendant in Shell was a building contractor who had entered into an agreement with the federal government under which he received priorities for building materials and agreed in return to use the materials to build homes with required specifications for sale to war veterans at or below ceiling prices. Plaintiffs were 12 veterans, each of whom had purchased a home that failed to comply with the agreed specifications. They were held entitled to recover directly from the defendant contractor as third party beneficiaries of his agreement with the government. The legislation under which the agreement was made included a provision empowering the government to obtain payment of monetary compensation by the contractor to the veteran purchasers for deficiencies resulting from failure to comply with specifications. Thus, there was "an intention . . . manifested in the contract . . . that the promisor shall compensate members of the public for such injurious consequences (of nonperformance)."^[4]

[11 Cal.3d 404] Plaintiffs contend that section 145 of the Restatement of Contracts, previously quoted, does not preclude their recovery because it applies only to promises made to a governmental entity "to do an act or render a service to . . . the public," and, plaintiffs assert they and the class they represent are identified persons set apart from "the public." Even if this contention were correct it would not follow that plaintiffs have standing as third party beneficiaries under the Restatement. The quoted provision of section 145 "is a special application of the principles stated in §§ 133(1a), 135 (on donee beneficiaries)" (Rest., Contracts, § 145, com. a), delineating certain circumstances which preclude government contractors' liability to third parties. Section 145 itself does not purport to confer standing to sue on persons who do not otherwise qualify under basic third party beneficiary principles. ^[5] As pointed out above, plaintiffs are not donee beneficiaries [113 Cal.Rptr. 592] [521 P.2d 848] under those basic principles because it does not appear from the terms and circumstances of the contract that the Government intended to make a gift to plaintiffs or to confer on them a legal right against the defendants.

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 [11 Cal.3d 405] for a test program of cooperation between the federal government and private industry in an effort to provide training and jobs for thousands of the hard-core unemployed or under-employed.^[6] The congressional declaration of purpose of the Economic Opportunity Act as a whole points up the public nature of its benefits on a national scale. Congress declared that the purpose of the act was to "strengthen, supplement, and coordinate efforts in furtherance of (the) policy" of "opening to everyone the opportunity for education and training, the opportunity to work, and the opportunity to live in decency and dignity" so that the "United States can achieve its full economic and social potential as a nation." (42 U.S.C. § 2701.)^[7]

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 concentration 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 arresting [11 Cal.3d 406] tendencies toward dependency, chronic unemployment, and rising community tensions. (42 U.S.C. former § 2763.)^[8] Thus the contracts here [113 Cal.Rptr. 593] [521 P.2d 849] were designed not to benefit individuals as such but to utilize the training and employment of disadvantaged persons as a means of improving the East Los Angeles neighborhood. Moreover, the means by which the contracts were intended to accomplish this community improvement were not confined to provision of the particular benefits on which plaintiffs base their claim to damages—one year's employment at minimum wages plus $1,000 worth of training to be provided to each of 650 persons by one defendant, 400 by another, and 550 by another. Rather the objective was to be achieved by establishing permanent industries in which local residents would be permanently employed and would have opportunities to become supervisors, managers and part owners. The required minimum capital investment of $5,000,000 by each defendant and the defendants' 22-year lease of the former Lincoln Heights jail building for conversion into an industrial facility also indicates the broad, long-range objective of the program. Presumably, as the planned enterprises prospered, the quantity and quality of employment and economic opportunity that they provided would increase and would benefit not only employees but also their families, other local enterprises and the government itself through reduction of law enforcement of welfare costs.

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.)^[9] For example, in City & County of San Francisco v. Western Air Lines, Inc., supra, 204 Cal.App.2d 105, 22 Cal.Rptr. 216, the agreement between the federal government and the city for improvement of the airport could be considered to be of greater benefit to air carriers using the airport than to many other members of the public. Nevertheless, Western, as an air carrier, was but an incidental, not an express, beneficiary of the agreement and therefore had no standing to enforce the contractual prohibition against [11 Cal.3d 407] discrimination in the airport's availability for public use. The court explains the distinction as follows:

"None of the documents under consideration confers on Western the rights of a third-party beneficiary. The various contracts and assurances created benefits and detriments as between only two parties—the United States and the City. Nothing in them shows any intent of the contracting parties to confer any benefit directly and expressly upon air carriers such as the defendant. It is true that air carriers, including Western, may be Incidentally benefited by City's assurances in respect to nondiscriminatory treatment at the airport. They may also be incidentally benefited by the fact that, through federal aid, a public airport is improved with longer runways, brighter beacons, or larger loading ramps, or by the fact a new public airport is provided for a community without one. The various documents and agreements were part of a federal aid program directed to the promoting of a national transportation system. Provisions in such agreements, including the nondiscrimination clauses, were intended to advance such federal aims and not for the benefit of those who might be affected by the sponsor's failure to perform." (204 Cal.App.2d at p. 120, 22 Cal.Rptr. at p. 225.)

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 [113 Cal.Rptr. 594] [521 P.2d 850] federal law applies to government contracts.^[10]

The judgments of dismissal are affirmed.

McCOMB, SULLIVAN, and CLARK, JJ., concur.

BURKE, Justice (dissenting).

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.

[11 Cal.3d 408] As the majority point out, we must reverse the order sustaining the demurrer in this case if we determine the written contracts incorporated into the complaint support plaintiffs' claim either on their face or under any interpretation to which the contracts are reasonably susceptible (maj. opn., p. 588). Furthermore, at this stage of the proceedings, the question of plaintiffs' ability to prove these allegations does not concern us, for plaintiffs need only plead facts showing they may be entitled to some relief. (Alcorn v. Anbro Engineering, Inc., 2 Cal.3d 493, 496, 86 Cal.Rptr. 88, 468 P.2d 216.)

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 thereto rescind it." The general principles applicable to such contracts are set forth in Shell v. Schmidt, 126 Cal.App.2d 279, 290-291, 272 P.2d 82, 89, as follows:

"(A) third party beneficiary may maintain an action directly on such a contract. (Citation.) The promise in such a situation is treated as having been made directly to the third party. (Citation.) It is no objection to an action by the third party that the contracting party (here the government) could also sue upon the contract for the same breach. (Citation.) Of course, the beneficiary must be more than incidentally benefited by the contract. An incidental beneficiary cannot successfully maintain an action. (Citation.) Whether the beneficiary is or is not an incidental one, or a beneficiary for whose express benefit the contract was entered into, is a question of construction. (Citation.) It is not required that the third party beneficiary be specifically named as a beneficiary. All that section 1559 requires is that the contract be 'made expressly for the benefit of a third person,' and 'expressly' simply means 'in an express manner; in direct or unmistakable terms; explicitly; definitely; directly.' (Citation.) ( ) Where the contract is for the benefit of a class any members or member of the intended class may enforce it. (Citation.) The fact that the government is one of the contracting parties does not change the rule." (Italics added.)

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, [113 Cal.Rptr. 595] [521 P.2d 851] was to benefit only the general public and particularly the local neighborhoods where these programs were to be implemented. Although members[11 Cal.3d 409] of plaintiffs' class "were among those whom the Government intended to benefit. . . ," (maj. opn., p. 589) the benefits accruing to plaintiffs' class, according to the majority, were merely "means of executing the public purposes stated in the contracts and in the underlying legislation." (P. 587, italics added.)

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.^[11] The benefits from the instant contracts were to accrue directly to the members of plaintiffs' class, as a reading of the contracts clearly demonstrates.^[12] These direct benefits to members of plaintiffs' class were not merely the "means of executing the public purposes," as the majority contend (p. 589, italics added), but were the Ends in themselves and one of the public purposes to which the legislation and subsequent contracts were addressed. Accordingly, I cannot agree with the majority that "the contracts here were designed Not to benefit individuals as such but to utilize the training and employment of disadvantaged persons as a Means of improving the East Los Angeles neighborhood." (Pp. 592, 593, italics added.)

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 ( ) 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 hardcore[11 Cal.3d 410] unemployed, or underemployed, 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:. . . ." (Italics added.) By these provisions, the contracting parties clearly state as one of their purposes their intent to find jobs for the hard-core unemployed.

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 [113 Cal.Rptr. 596] [521 P.2d 852] 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, 56 Cal.2d 583, 590, 15 Cal.Rptr. 821, 364 P.2d 685, we noted that one of the usual characteristics of a third party beneficiary contract is that performance is to be rendered directly to the beneficiary. The direct benefits to accrue to the beneficiaries as enumerated above renders inescapable the conclusion that these are third party beneficiary contracts.

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., 10 Cal.2d 232, 247, 73 P.2d 1163; Ralph C. Sutro Co. v. Paramount, 216 Cal.App.2d 433, 437, 31 Cal.Rptr. 174.) And, as will be discussed more fully, Infra, nor does the existence of a liquidated damages clause running in favor of the government defeat plaintiffs' right to recover under the contract; the fact that the government may also being an action for the same breach does not [11 Cal.3d 411] bar the third party beneficiary from enforcing his rights. (Shell v. Schmidt, Supra, 126 Cal.App.2d 279, 290, 272 P.2d 82.) All that is necessary is that the third party show he is a member of a class for whose benefit the contract was made. (Shell v. Schmidt, Supra; Ralph C. Sutro Co. v. Paramount, Supra.) Thus, plaintiffs have standing to bring an action for the breach of defendants' contracts with the government.

The majority, relying on Restatement of Contracts section 145, and City and County of San Francisco v. Western Air Lines, Inc., 204 Cal.App.2d 105, 22 Cal.Rptr. 216, conend that in the context of government contracts the intent to confer upon a third party a right of action against the promisor must be express; that intent "cannot be inferred simply from the fact that the third persons were intended to enjoy the benefits. . . ." (P. 589.) The majority insist that "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." (P. 593.) The majority conclude (p. 592) that "section 145 of the Restatement of Contracts does preclude (plaintiffs') 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." (Italics added by majority.)

The majority's reliance on Restatement of Contracts section 145, and City and County of San Francisco v. Western Air Lines, Inc., Supra, 204 Cal.App.2d 105, 22 Cal.Rptr. 216, is misplaced. An analysis of section 145 of the Restatement (which also forms a part of the basis for the rule of Western Air lines) indicates that its provisions are not applicable to the case at hand. Section 145 provides in pertinent part that

"A promisor bound to the United States or to a State or municipality by contract to do an act or render a service To some or all of the members of the public, is subject to no duty under the contract to Such members to give compensation for the injurious consequences of performing or attempting to perform it, or of failing to do so, unless, (a) an intention is manifested in the light of the circumstances surrounding its formation, that the promisor shall Compensate members of the public for such injurious consequences. . . ." (Italics added.)

[113 Cal.Rptr. 597] [521 P.2d 853] 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 [11 Cal.3d 412] of persons who are to receive a direct benefit. The beneficiaries of these contracts are to receive the promised performance because of their membership in a particularly defined and limited class and not simply because they are members of the public in general. Defendants are not bound to "do an act or render a service to some or all of the members of the public"; thus, by its own terms, section 145 of the Restatement is not applicable.

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

"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. . . ."^[13] Section 135 of the Restatement makes such a contract enforceable by the donee beneficiary.^[14]

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 ascertainable [11 Cal.3d 413] class of persons, section 145 is, by its terms, inapplicable and the contract may be enforced by the beneficiaries pursuant to the general provisions of section 133. Thus, I would conclude that section 145 is consistent with the holding of Shell v. Schmidt, Supra, 126 Cal.App.2d 279, 272 P.2d 82, and the City and County of San Francisco v. Western Air Lines, Inc., Supra, 204 Cal.App.2d 105, 22 Cal.Rptr. 216.^[15]

[113 Cal.Rptr. 598] [521 P.2d 854] In City and County of San Francisco v. Western Air Lines, Inc., Supra, 204 Cal.App.2d 105, 22 Cal.Rptr. 216, 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, 22 Cal.Rptr. p. 224, 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, 22 Cal.Rptr. p. 225.) 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, 22 Cal.Rptr. p. 225.)

The rationale for the Western Air Lines rule is set out in Ukiah v. Ukiah Water and Imp. Co., 142 Cal. 173, 180, 75 P. 773, 775 (quoting from an earlier case) as follows, "The bar to such a recovery in each case is that The contract was not for the protection of any particular property or [11 Cal.3d 414] person, but was for the general benefit of all the property and persons within the municipal limits, and was entered into by the town as a public agency, solely for that purpose, and in the exercise of its power to furnish such general protection." (Italics added.)

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" (maj. opn., p. 588), 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 the 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, 22 Cal.Rptr. 216.) 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, 126 Cal.App.2d 279, 290-291, 272 P.2d 82, so long as the contract Expressly declares an intent to benefit a [113 Cal.Rptr. 599] [521 P.2d 855] particular individual or class of persons, such persons may enforce their rights under the contract notwithstanding the absence of a provision for damages for such beneficiaries in the event of breach. Therefore, the facts of the instant case are distinguishable from those of Western Air Lines and, furthermore, Restatement of Contracts section 145 is not applicable.

The majority contend that the inclusion of liquidated damages clauses in each of the contracts limits defendants' financial risks and was intended to preclude the assertion of third party claims. (P. 590.) 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, 126 Cal.App.2d 279, 290, 272 P.2d 82.)

[11 Cal.3d 415] The majority also rely on the fact that, "The present contracts manifest no intent that the defendants pay damages to compensate plaintiffs or other members of the public for their nonperformance." (P. 590.) Therefore, it assertedly follows that giving plaintiffs the right to monetary benefits in lieu of performance would give to plaintiffs and the class they represent benefits never contemplated nor intended under the contracts. This argument disregards both the fact that the class was to receive a direct monetary benefit under the contracts in the form of wages, and that under well settled contract law, an aggrieved party is entitled to be compensated for all the detriment proximately caused by a breach of contract (Civ.Code, § 3300).

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., 3 Cal.3d 176, 181, 89 Cal.Rptr. 737, 474 P.2d 689.) Thus, the fact that plaintiffs' class has been promised only jobs and job training does not prevent them from recovering an amount of money which will compensate them for the loss of such jobs and training, i.e., the damages proximately caused by defendants' breach. (Civ.Code, § 3300, Supra.)

It is my conclusion, therefore, 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 and MOSK, JJ., concur.

[1] The fourth, fifth, and tenth causes of action, being directed solely against nonappearing defendants, to wit, Lady Fair and its officers and directors, are not before us on this appeal.

[2] 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.

[3] Comment A of a 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 conditions of Subsection (2)(b) (including governmental inability 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.)

[4] In contrast to Shell, supra, is City & County of San Francisco v. Western Air Lines, Inc., supra, 204 Cal.App.2d 105, 22 Cal.Rptr. 216. There, Western Air Lines claimed to be a third party beneficiary of agreements between the federal government and the City and County of San Francisco under which the city received federal funds for the development of its airport subject to a written condition that the airport "be available for public use on fair and reasonable terms and without unjust discrimination." Western Air Lines asserted that it had been charged for its use of the airport at a higher rate than some other air carriers in violation of the contractual condition, and therefore was entitled to recover the excess charges from the city. One of the reasons given by the court on appeal for rejecting this contention was the absence of any provision or indication of intent in the agreements between the government and the city to compensate third parties for noncompliance. The court said:

"The granting agreement in each instance entitles the (federal) administrator to recover all grant payments made where there has been any misrepresentation or omission of a material fact by the sponsor (i.e., the city). We find no other provision for [113 Cal.Rptr. 599] recovery of funds by the administrator and none whatsoever permitting recovery of money or excess rates by a private party. Indeed the language of the granting agreement itself appears to us to point up that it is simply and entirely a financial arrangement between two parties. As the agreement states, it constitutes 'the obligations and rights of the United States and the Sponsor with respect to the accomplishment of the Project. . . ." (204 Cal.App.2d at p. 120, 22 Cal.Rptr. at p. 225.)

[5] The same is true of the Tentative Draft of section 145 of the Restatement Second of 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.

[6] 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 Nation 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 training 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: . . ."

[7] 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."

[8] 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-in-come 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."

[9] This illustration is repeated in Tentative Drafts, Restatement Second of Contracts, section 145, illustration 1.

[10] 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) 332 U.S. 407, 411, 68 S.Ct. 123, 92 L.Ed. 32; Clearfield Trust Co. v. United States (1943) 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838.) In disputes between private parties over conflicting claims stemming from United States government contracts, the applicability of federal law to particular issues is generally held to depend on the degree to which the outcome will affect the government's interests. (Bank of America v. Parnell (1956) 352 U.S. 29, 77 S.Ct. 119, 1 L.Ed.2d 93; United States v. Taylor (5th Cir. 1964) 333 F.2d 633, 638; American Pipe & Steel Corp. v. Firestone Tire & Rubber Co. (9th Cir. 1961) 292 F.2d 640, 643.) In view of our holding it is unnecessary for us to decide whether or to what extent federal law applies in the present case.

[11] Evidence of Congress' purpose to aid the Individual impoverished persons in such communities can be gleaned from 42 U.S.C.A. § 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.

[12] 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.

[13] 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, 126 Cal.App.2d 279, 290-291, 272 P.2d 82. Section 133 has been followed by the California courts. (Hartman Ranch Co. v. Associated Oil Co., Supra, 10 Cal.2d 232, 244, 73 P.2d 1163; Southern Cal. Gas Co. v. ABC Construction Co., 204 Cal.App.2d 747, 752, 22 Cal.Rptr. 540.)

[14] 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 performance to the donee beneficiary."

[15] The tentative draft of section 145 in Restatement 2d, 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 a 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 government 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.

643 F.2d 1261

Doris HOLBROOK, Plaintiff-Appellant,
v.
Henry C. PITT, Defendant and Third-Party Plaintiff,
v.
SECRETARY, UNITED STATES DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT, Third-Party Defendant-Appellee.

No. 80-1006.
United States Court of Appeals,
Seventh Circuit.
Argued May 28, 1980.
Decided March 2, 1981.
Rehearing Denied July 2, 1981.

[1264] Lawrence G. Albrecht, James A. Grambling, Jr., Legal Action of Wisconsin Inc., Milwaukee, Wis., for plaintiff-appellant.

William C. Calahan, Jr., Asst. U. S. Atty., Milwaukee, Wis., for third-party defendant-appellee.

Before BAUER, Circuit Judge, KILKENNY, Senior Circuit Judge,^[*] and CUDAHY, Circuit Judge.

CUDAHY, Circuit Judge.

This is an appeal by tenants of certain housing projects in Wisconsin who are beneficiaries of housing assistance payments made by the United States Department of Housing and Urban Development ("HUD") under its housing assistance program for existing multifamily projects benefiting from HUD-insured or HUD-held mortgages. This program was established pursuant [1265] to Section 8 of the United States Housing Act of 1937 (as amended by § 201(a) of the Housing and Community Development Act of 1974), 42 U.S.C. § 1437f (1976) ("Section 8"). Under this program, HUD executes contracts with project owners to make rental payments on behalf of eligible low-income tenants (the "Contracts"). Appellants contend they are entitled to these rent subsidies within a reasonable time after the effective date of the Contracts between HUD and the various project owners. The tenants also argue that the rent subsidies should be made retroactive to the effective dates of the respective Contracts. Appellants further claim that HUD's procedures for making rental assistance payments violate the Due Process clause of the Fifth Amendment to the United States Constitution.

The district court granted summary judgment in favor of the Secretary of HUD (the "Secretary"), who was the third-party defendant, finding that the tenants had no claim under the Contracts since no provisions of the Contracts were breached. The district court also found that the tenants' interest in receiving housing assistance payments was only a "subjective expectancy" which was not entitled to due process protection. We hold that the Contracts were breached and that the tenants can recover retroactive benefits as third-party beneficiaries; we also find that tenants in existing HUD-insured projects assisted under Section 8 are generally entitled to housing assistance benefits within a reasonable time after the effective date of the applicable Section 8 Contract. We further determine that appellants have a legitimate claim of entitlement to housing assistance payments as of the effective dates of the Contracts. We therefore reverse and remand.

The Case

This litigation began as a small claims action in Milwaukee County Court in July 1977, to recover housing assistance payments allegedly due to plaintiff Doris Holbrook from defendant Henry Pitt, the owner of Main Street Gardens, the housing project in which Holbrook lived. Pitt subsequently filed a third-party complaint against the Secretary, alleging a breach of duty to inform Pitt of his Section 8 Contract obligations. HUD removed the action to the United States District Court for the Eastern District of Wisconsin.

After the district court granted Holbrook's motion to amend her complaint, the original complaint was redesignated as Count I. In Count II, Holbrook then asserted a class claim for declaratory judgment and damages on behalf of the class of tenants in multifamily projects in Wisconsin who had been certified for Section 8 assistance payments by the owners of their dwelling units.^[1] Count II was based on the theory that the members of the tenant class were third-party beneficiaries of the Contracts executed between HUD and the owners of the projects in question, and that the class was thereby entitled to Section 8 benefits retroactive to the effective dates of the Contracts, payable within a reasonable time after the dates of execution.

In Count III, the plaintiff class alleged that they were denied retroactive assistance payments in violation of the Due Process clause of the Fifth Amendment to the United States Constitution.^[2] The tenants argued that they had a legitimate claim of entitlement to the receipt of Section 8 benefits as of the date of Contract execution and that the provision of such benefits must commence not later than thirty days after [1266] the execution date. To enforce these rights, plaintiffs requested, inter alia, that HUD be ordered to provide a meaningful opportunity for all class members to challenge HUD's procedures regarding administration of the Contracts.

After extensive discovery, the parties, on a joint statement of uncontested facts, filed cross motions for summary judgment. While these motions were pending, Pitt certified Holbrook for the claimed retroactive housing assistance payments. HUD then tendered full payment to Holbrook.

The district court found that, because of the payment to Holbrook, Count I had become moot. As to Count II, the district court held that, even assuming that plaintiffs were third-party beneficiaries, they were bound by the terms of the Section 8 Contracts, which HUD had not breached. With respect to Count III, the court found that plaintiffs possessed only an "inchoate property interest" in the receipt of housing assistance payments, which was merely a "subjective expectancy" not entitled to due process protection. HUD's motion for summary judgment was therefore granted.^[3]

Plaintiff Holbrook lived with her four minor children in Milwaukee, Wisconsin in Main Street Gardens, a housing development owned by Henry Pitt. On June 10, 1976, HUD and Pitt executed a Section 8 Contract under which housing assistance payments were to be paid to Pitt's eligible tenants, including Holbrook. Under the Contract, HUD committed funds to make housing assistance payments on behalf of eligible tenants as of June 1976. Funds were not disbursed under the Contract, however, until Pitt certified to HUD the names of the eligible tenants and the amount of subsidy to which each was entitled.^[4]

Despite prodding by Holbrook and HUD, a Section 8 application, and eligibility and certification forms were not mailed by Pitt to residents of Main Street Gardens until November 16, 1976. Holbrook and other eligible families at Main Street Gardens were then certified and received Section 8 payments beginning December 1976. But, at the time of certification, no retroactive payments were made, as were authorized and for which funds had been set aside.^[5]

The Section 8 Program

The federal policy of providing decent, safe and sanitary housing for all families, [1267] first articulated in the United States Housing Act of 1937, ch. 896, 50 Stat. 888 (codified in scattered sections of 42 U.S.C.), has inspired numerous programs designed to increase the availability of housing for lower income families.^[6] The Section 8 lower income housing assistance program, which was enacted as part of the Housing and Community Development Act of 1974, Pub.L. 93-383, 88 Stat. 633 (codified in scattered sections of 5, 12, 20, 31, 42, 49 U.S.C.), is one of the most ambitious of these efforts.^[7] This program was enacted for the dual purposes "of aiding lower-income families in obtaining a decent place to live and of promoting economically mixed housing." 42 U.S.C. § 1437f(a) (1976). Section 8 was designed to achieve these goals by providing rent subsidies to lower income families living in housing owned primarily by private developers. All tenants whose incomes do not exceed 80 percent of the median income for their area are eligible for Section 8 assistance.^[8]

In implementing Section 8, HUD has created several distinct subprograms, which are set forth in the regulations found at 24 C.F.R. § 880 et seq. (1980). Defined according to the characteristics of the housing to be subsidized, there are separate subprograms governing Section 8 assistance payments for, inter alia, newly constructed housing, 24 C.F.R. § 880 (1980), substantially rehabilitated housing, 24 C.F.R. § 881 (1980), existing housing, 24 C.F.R. § 882 (1980), and housing developed under public housing agency programs, 24 C.F.R. § 883 (1980).

Appellants reside in projects with HUD-insured or HUD-held mortgages. Main [1268] Street Gardens, for example, where Holbrook resides, received the benefit of mortgage interest payments under Section 236 of the Housing and Urban Development Act of 1968, 12 U.S.C. § 1715z-1 (1976).^[9]

The regulations applicable to the making of housing assistance payments on behalf of tenants in projects subject to HUD-insured mortgages are found at 24 C.F.R. § 886 (1980). These regulations, together with HUD's program instruction handbook,^[10] establish the policies and procedures pursuant to which HUD makes housing assistance payments for projects with HUD-insured mortgages. The heart of this Section 8 subprogram is the Contract between HUD and the owner, which governs the relationship between the contracting parties and defines the rights and duties of the owner with respect to the administration of the Section 8 subprogram.

Prior to execution of a Contract, the owner must submit information regarding the gross income, number of household members under age 18 and rent-to-income ratio for each resident household, present vacancies and any rental increases currently being processed by HUD. At the time a Contract is executed, HUD commits funds to that project. The dollar amount of HUD's maximum commitment of funds is set at 75 percent of the current HUD-approved rents for the units expected to receive Section 8 subsidies. These units include the units occupied by families whose gross incomes and rent payments would appear to make them eligible for Section 8 assistance as well as the units that were vacant when the owner applied for a Contract. This calculation of the maximum contract commitment can include a proposed rent increase if HUD anticipates its approval.

Pursuant to paragraph 1.9c of the model Contract,^[11] the owner is responsible for determining and verifying the eligibility of families, processing necessary application and verification forms, selecting families who will receive Section 8 assistance,^[12] and computing the amount of housing assistance payments to be made on their behalf, a process denominated as "certification."^[13] Upon the completion of certification of eligible [1269] families by the owner, HUD makes housing assistance payments to owners on behalf of tenants in accordance with the provisions of the Contract.^[14]

HUD also maintains a project account "to assure that housing assistance payments will be increased on a timely basis to cover (HUD-approved) increases in Contract rents or decreases in Family Incomes." 24 C.F.R. § 886.108(c) (1980). According to HUD's regulations, this project account is established and maintained "out of amounts by which the maximum annual Contract commitment per year exceeds amounts paid under the Contract for any year." 24 C.F.R. § 886.108(c)(1) (1980). It appears from the record, however, that HUD actually deposits the entire amount of the maximum contract commitment in a segregated account at the time the Contract is executed.

Although HUD imposes no duty on owners to submit certifications at any specified time,^[15] HUD regulations allow housing assistance payments to be made as of the effective date of the Contract and funds are committed by HUD to provide for payments from that date. 24 C.F.R. § 886.108 (1980). HUD, however, has refused to make housing assistance payments on behalf of tenants for the period between the effective date of the Contract and the month in which tenants are certified by the project owner, unless the owner provides for proper certification (termed "retroactive certification") for the intervening months.

After the effective date of a Contract, but before the initiation of housing assistance payments, HUD provides no administrative process for determining a tenant's eligibility to receive housing assistance payments. Nor does an administrative procedure exist whereby an eligible (whether certified or uncertified) family may, in appropriate circumstances, challenge either a project owner's initial delay in certifying eligible tenants for payments or an owner's unwillingness or refusal to certify tenants for payments retroactive to the Contract date.

Discussion

1. Tenants' Third-Party Beneficiary Claim

In Count II, the tenant class asserted their rights as third-party beneficiaries of the Contracts executed between HUD and the owners. The tenants sought prompt implementation of the Contracts as well as the receipt of retroactive benefits. The district court declined to rule on the third-party beneficiary issue but found that, in any event, the Contracts had not been breached since HUD had no contractual duty to pay benefits from the effective dates of the Contracts. Holbrook v. Pitt, 479 F.Supp. 990, 994 (E.D.Wis.1979).

Plaintiffs' approach in this case seems to have made analysis of their claims for retroactive benefits unnecessarily difficult. They argue that HUD has improperly administered the Section 8 program by totally delegating certification responsibilities to [1270] the owners. While this argument may have merit in the context of a claim that HUD has failed to meet its Section 8 obligations, it is only obliquely related to plaintiffs' claim that HUD has breached the Contracts before us.

In her original action, Holbrook had named Pitt, the owner of her building, as defendant. Pitt was dismissed from this action when he certified Holbrook for retroactive benefits and those benefits were paid to Holbrook by HUD. The other Wisconsin project owners who had executed Contracts with HUD were not named as defendants, however, when plaintiff subsequently asserted her class claim. Yet, since the Contracts place the obligation to certify tenants on the owners, it is not HUD but the owners who have most clearly breached the duty to properly certify the tenants. Despite this discrepancy, however, we have concluded that tenants can recover retroactive benefits because HUD breached its obligation to properly administer the Contracts by accepting non-retroactive certifications from the owners.

Under settled principles of federal common law,^[16] a third party may have enforceable rights under a contract if the contract was made for his direct benefit. Crumady v. The Joachim Hendrik Fisser, 358 U.S. 423, 428, 79 S.Ct. 445, 448, 3 L.Ed.2d 413 (1959); Williams v. Fenix & Scisson, Inc., 608 F.2d 1205, 1208 (9th Cir. 1979); Owens v. Haas, 601 F.2d 1242, 1248-50 (2d Cir.), cert. denied, 444 U.S. 980, 100 S.Ct. 483, 62 L.Ed.2d 407 (1979); Roberts v. Cameron-Brown Co., 556 F.2d 356, 362 (5th Cir. 1977); Olzman v. Lake Hills Swim Club, Inc., 495 F.2d 1333, 1339 (2d Cir. 1974); Euresti v. Stenner, 458 F.2d 1115, 1118-19 (10th Cir. 1972); Inglewood v. Los Angeles, 451 F.2d 948, 955-56 (9th Cir. 1971); Bossier Parish School Board v. Lemon, 370 F.2d 847 (5th Cir.), cert. denied, 388 U.S. 911, 87 S.Ct. 2116, 18 L.Ed.2d 1350 (1967). If the agreement was not intended to benefit the third party, however, he is viewed as an "incidental" beneficiary, having no legally cognizable rights under the contract.^[17] German Alliance Insurance Co. v. Home Water Supply Co., 226 U.S. 220, 33 [1271] S.Ct. 32, 57 L.Ed. 195 (1912); Williams v. Fenix & Scisson, Inc., 608 F.2d at 1208; 4 A. Corbin, Corbin on Contracts, § 776 at 18-19 (1951); Restatement of Contracts, § 133 at 151-52 (1932).

To determine whether plaintiffs have enforceable rights under the Contracts we must analyze the purposes underlying their formation. Plaintiffs maintain that HUD executed the Contracts in order to provide rental assistance to low income families. HUD, however, claims that plaintiffs are only incidental beneficiaries of the Contracts, since the primary purpose of the Section 8 program, and the Contracts entered into pursuant thereto, was to benefit financially troubled HUD-insured projects. We reject this argument, as it is contradicted by the language of Section 8, relevant legislative history, HUD's implementing regulations and interpretations and the terms of the Contracts.^[18] HUD's position displays an astonishing lack of perspective about government social welfare programs. If the tenants are not the primary beneficiaries of a program designed to provide housing assistance payments to low income families, the legitimacy of the multi-billion dollar Section 8 program is placed in grave doubt.

Congress did not establish the Section 8 housing assistance program merely to limit claims on HUD's insurance fund that might be occasioned by assignments or foreclosures of HUD-insured mortgages. Congress authorized Section 8 payments "(f)or the purpose of aiding lower-income families in obtaining a decent place to live and of promoting economically mixed housing." 42 U.S.C. § 1437f(a) (1976).

Section 8 is designed to provide rent subsidies to needy families. If Congress had intended to design Section 8 primarily to assist financially troubled projects (rather than low-income families), it would have provided that Contracts would be awarded and funding structured in accordance with the financial condition of the housing projects.^[19] Instead, it provided that Section 8 funds should be allocated according to the [1272] financial needs of the tenants. The statute does not establish a preference for projects that may soon be in default on HUD-insured mortgages, but it does provide that 30 percent of the families assisted by Section 8 funds must be "very low-income families," 42 U.S.C. § 1437f(c)(7) (1976), which are defined as "those families whose incomes do not exceed 50 per centum of the median income for the area." 42 U.S.C. § 1437f(f)(2) (1976).^[20]

HUD has also recognized that the function of the Section 8 subprogram we are considering is to assist low income families in securing decent, safe and sanitary housing. Thus, HUD's introduction to the regulations that established this subprogram provides:

The purpose of this program is to assist families presently in occupancy in a HUD-insured or HUD-assisted project to more easily carry their rental burden.

42 Fed.Reg. 5602 (Jan. 28, 1977).

HUD's regulations further demonstrate that the Section 8 program is designed primarily to benefit low-income families. Under the regulations, a Contract may be executed only after a project owner establishes that a significant number of existing or potential tenants are "eligible for and in need of Section 8 assistance." 24 C.F.R. § 886.107(d) (1980). And, when a Contract is executed, HUD calculates and budgets funds not on the basis of the financial needs of the project's management but on the estimated rental assistance needs of eligible tenants.

The Contract terms also demonstrate that the tenants are intended beneficiaries of the Contracts. Paragraph 1.3(b)(1) provides, in part:

The Government hereby agrees to make housing assistance payments on behalf of Families for the Contract Units, to enable such Families to lease Decent, Safe, and Sanitary housing pursuant to Section 8 of the Act.

Numerous other Contract provisions make it clear that the Contracts were executed primarily for the tenants' benefit. Paragraph 1.7, for example, requires the owners to "maintain and operate the Contract unit and related facilities so as to provide Decent, Safe and Sanitary housing." See also paragraph 1.9(a) (requiring affirmative action in owner's marketing of units and selection of families); paragraph 1.9(b) (restricting owner's discretion regarding the collection and refunding of utility and security deposits); paragraph 1.10 (restricting owner's right to evict tenants).

HUD, of course, perceives that the Section 8 program also serves to minimize claims on its insurance fund. The creation of a separate Section 8 subprogram exclusively for projects with HUD-insured mortgages is compelling evidence of this perception. It is also apparent from the introduction to HUD's Handbook, which reads:

The Section 8 set-aside program for existing multifamily projects benefiting from HUD-insured or HUD-held mortgages . . . is designed to accomplish two goals: (1) reduce the claims on HUD's insurance funds by stabilizing the finances of projects intended for low and moderate income residents by avoiding project mortgage assignments or, in projects with assigned mortgages, by preventing foreclosure and (2) assure the continued availability of units in these existing multifamily projects to the lower income families for whom they were intended by reducing to affordable levels the rent obligation of assisted families.^[21]

We do not decide whether it is proper for HUD, in allocating Section 8 funds, [1273] to give priority to projects with serious financial problems.^[22] We believe, however, that this preference does not contradict the fact that the Contracts before us are intended primarily to benefit needy tenants. Plaintiffs have enforceable rights since the Contracts were intended to provide them with rental assistance. Subsidiary purposes, such as HUD's interest in minimizing claims on its insurance funds, do not defeat plaintiffs' status as protected beneficiaries. See King v. National Industries, Inc., 512 F.2d 29, 32 (6th Cir. 1975); Avco Delta Corp. v. United States, 484 F.2d 692, 702 (7th Cir. 1973), cert. denied, 415 U.S. 931, 94 S.Ct. 1444, 39 L.Ed.2d 490 (1974); Beck v. Reynolds Metals Co., 163 F.2d 870, 871 (7th Cir. 1947).^[23]

Having concluded that plaintiffs have enforceable rights under the Contracts, we must determine whether the Contracts have been breached. The district court held that HUD did not violate any provision of the Contracts, since "it is the owner who is given the responsibility to effect certifications of eligibility, and there is no contract provision requiring HUD to make assistance payments until the necessary certifications (including retroactive certifications) are performed." Holbrook v. Pitt, 479 F.Supp. at 993.^[24] Because they are somewhat distinct, we will consider first the question whether HUD breached the Contracts because the tenants were not promptly certified, and second, the question whether HUD breached the Contracts because the tenants were not retroactively certified.

The district court refused to imply a Contract term that would require the [1274] owners to certify tenants within a reasonable time after execution of the Contract. We believe it is appropriate to imply such a term, since the purpose of the Contracts to provide housing assistance to lower income families would otherwise be frustrated. We agree with the district court, however, that HUD did not breach the Contracts with respect to the timing of certification.

The district court relied on paragraph 1.9(c) (Eligibility, Selection and Admission of Families), supra note 14, and on paragraph 1.11(a) (Reduction of Number of Contract Units for Failure to Lease to Eligible Families), supra note 16, of the Contracts in deciding that there was no contractual duty to certify tenants promptly. Paragraph 1.9(c), however, merely allocates the certification function to the owner. It does not address the form which certifications are to take, the date by which certifications are to be performed or the period of time certifications are intended to cover. Although paragraph 1.9(c) is silent on the question of time of performance, it is reasonably inferrable from the purpose of the Contract that the owner is obligated to perform his certification responsibilities within a reasonable time.^[25]

We are similarly unpersuaded that paragraph 1.11(a) is intended to be the sole contract limitation on the timing of certification. Paragraph 1.11(a)'s penalty provision would not be triggered until one year after the effective date of the Contract. It is inconceivable, however, that the parties intended to allow a full year for implementation (while housing assistance payments built up in project accounts) of a shelter program designed to provide economic relief for poor tenants. Paragraph 1.11(a) merely establishes one remedy which HUD may resort to in the event that a project owner fails to keep Contract units leased or available for leasing by eligible families. It does not purport to govern the date by which owners must perform certification.

Since all the tenants in the class designated in Count II have been certified, it is not necessary to determine what would be a reasonable time to perform certification under the circumstances of this case. Cf. A. M. R. Enterprises, Inc. v. United States Postal Savings Association, 567 F.2d 1277, 1281 (5th Cir. 1978). In any event, although we have implied a Contract term requiring prompt certification, we believe that the owners, and not HUD, breached this implied term, since HUD had no mechanism (in the Contracts before us) to force the owners promptly to certify tenants.^[26]

With respect to retroactive certification, the district court held that plaintiffs could not recover retroactive benefits because HUD was not "required, by the terms of the contract or otherwise, to pay retroactive benefits." Holbrook v. Pitt, 479 F.Supp. at 994. The court also refused to imply from the Contract that retroactive certification was required, finding again that paragraph 1.9(c) set "the terms and conditions of performance." Id. Yet we believe that paragraph 1.9(c) must be interpreted quite differently than the district court suggests. Paragraph 1.9(c) provides only that the owner is "responsible for . . . computation of the amount of housing assistance payments on behalf of each selected Family." It does not set forth the period for which housing assistance payments are to be requested [1275] or paid. It certainly does not suggest that the obligation to compute housing assistance payments includes the right to arbitrarily deny to tenants benefits from the date of Contract execution. The very use of the word "computation" connotes the application of a formula to numbers, not the exercise of discretion either arbitrary or informed.

We believe it is necessary to interpret the language of paragraph 1.9(c) to mean that retroactive certification is required. First, "computation" is a mathematical process presumably involving, inter alia, the multiplication of the amount of rental subsidy to which a particular tenant is entitled by the number of months the subsidy is due; the Contract language in no way suggests that the number of months is a matter of discretion. Rather, that number must be the number of months the tenant has lived in the project since the Contract governing Section 8 payments was executed (and funds were set aside). Second, unless the language is construed to require retroactive payment, the primary purpose of the Contracts to provide housing assistance to low income families would be frustrated. HUD has not offered any justification for its policy of accepting certifications that do not provide for retroactive benefits covering all relevant months, and we can perceive no circumstances that would justify such a policy.^[27]

HUD's calculation of the dollar amount of financial assistance it sets aside in a project account is based on the estimated monthly rental assistance needs of specific tenants beginning with the month in which the Contract is executed. HUD, therefore, has committed funds to pay housing assistance payments from the first day of the Contract period.^[28]

Although the owners may exercise limited discretion with regard to the selection [1276] of those families that are to receive benefits,^[29] the owners' obligation to "compute" the amount of housing assistance payments is entirely ministerial. No reason has been suggested for allowing the owners to determine whether tenants will or will not receive retroactive benefits.^[30] Therefore, by accepting deficient computations from the owners, we believe HUD breached its obligation to properly administer the Contracts, see 24 C.F.R. § 886.120(a) (1980), and its coordinate responsibility to third-party beneficiaries to fulfill the purposes of the Contracts, i. e., to provide full assistance benefits to certified families. Appellants can therefore recover retroactive benefits from HUD as third-party beneficiaries of the Contracts.

2. Tenants' Due Process Claim

The class of tenants designated in Count III of the complaint includes only those tenants "who were certified or who will be certified pursuant to the contracts for housing assistance payments but who did not or will not receive the benefit of housing assistance payments as of the effective date of the contracts."^[31] The narrow question before us, therefore, is whether the due process clause requires HUD to establish procedures to provide already certified tenants with notice and opportunity to be heard concerning the provision of retroactive benefits.^[32]

The existence and scope of appellants' due process rights depend on the resolution of three issues. First, there must be governmental [1277] action sufficient to invoke the guarantees of the fifth amendment. This requirement has clearly been met here. See Jackson v. Metropolitan Edison Co., 419 U.S. 345, 95 S.Ct. 449, 42 L.Ed.2d 477 (1974); Joy v. Daniels, 479 F.2d 1236, 1238 (4th Cir. 1973). Second, the asserted interest must be shown to be a "liberty" or a "property" interest to which there is a claim of entitlement under the due process clause. Morrissey v. Brewer, 408 U.S. 471, 481-83, 92 S.Ct. 2593, 2600-01, 33 L.Ed.2d 484 (1972). Third, assuming an entitlement is established, what process is due? Mathews v. Eldridge, 424 U.S. 319, 96 S.Ct. 893, 47 L.Ed.2d 18 (1976). See generally Coppenbarger v. Federal Aviation Administration, 558 F.2d 836, 839 (7th Cir. 1977).

In determining whether appellants have a constitutionally protected property interest, we are guided by the well-known discussion in Board of Regents v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 2709, 33 L.Ed.2d 548 (1972):

To have a property interest in a benefit, a person clearly must have more than an abstract need or desire for it. He must have more than a unilateral expectation of it. He must, instead, have a legitimate claim of entitlement to it. It is a purpose of the ancient institution of property to protect those claims upon which people rely in their daily lives, reliance that must not be arbitrarily undermined. It is a purpose of the constitutional right to a hearing to provide an opportunity for a person to vindicate those claims.

Property interests, of course, are not created by the Constitution. Rather, they are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law rules or understandings that secure certain benefits and that support claims of entitlement to those benefits.

It is clear in the present case that appellants have established a legitimate claim of entitlement^[33] The tenants' interest in retroactive benefits rises above a subjective expectancy or a "unilateral expectation," Board of Regents v. Roth, 408 U.S. at 577, 92 S.Ct. at 2709, since, as concluded above, certified tenants have legally enforceable rights as beneficiaries under the Contracts to receive retroactive benefits.^[34]

In similar circumstances, the United States Supreme Court held in Perry v. Sindermann, 408 U.S. 593, 601-02, 92 S.Ct. 2694, 2699-2700, 33 L.Ed.2d 570 (1972), that a teacher at a state college would have a [1278] protectable interest in continued employment if he could demonstrate that his tenure claim was based upon an implied term in his employment contract. Here we have, in effect, implied a Contract term requiring retroactive certification. Tenants therefore have a legitimate claim of entitlement to such benefits.^[35]

Courts have held in a variety of circumstances that certified tenants in Section 8 programs have protectable property interests under the due process clause. For example, Ferguson v. Metropolitan Development & Housing Agency, 485 F.Supp. 517 (M.D.Tenn.1980) and Watkins v. Mobile Housing Board, No. 79-0067-P (S.D.Ala. May 14, 1979) (order on plaintiff's motion for preliminary injunctive relief), both held that tenants have due process rights in connection with the termination of their certificates of family participation in the Section 8 subprogram for existing housing.^[36] See also Brezina v. Dowdall, 472 F.Supp. 82 (N.D.Ill.1979). And, in Ressler v. Landrieu, No. A77-228C (D.Alas. March 6, 1980), the court extended due process protection to prospective applicants for Section 8 payments who were not yet certified, but who met the Section 8 eligibility criteria, despite the fact that project owners exercise limited discretion with respect to the selection of tenants to be certified. See note 12, supra.

The district court's analysis in the present case is inapposite because it is based on the assumption that appellants were claiming due process protection for tenants who had not yet been certified.^[37] The class designated in Count III, however, is limited to those tenants who have already been certified and, probably in addition, those who will be certified in the future under existing Contracts.^[38] But see note 31, supra. Thus, tenants are included in the class denominated in Count III only after they have been certified. We therefore do not express any opinion on the district court's holding that [1279] non-certified tenants do not have a legitimate claim of entitlement under the due process clause. But see Ressler v. Landrieu, No. A77-228C (D.Alas. March 6, 1980).

The district court relied on Judge Hufstedler's dissent in Geneva Towers Tenants Organization v. Federated Mortgage Investors, 504 F.2d at 494-96, in support of the proposition that neither Congress nor HUD has "manifested an intention 'to create a governmental obligation' to tenants who have not been certified as eligible to receive section 8 benefits." Holbrook v. Pitt, 479 F.Supp. at 995.

The claim of entitlement rejected by Judge Hufstedler in Geneva Towers and by this court in Harlib v. Lynn, 511 F.2d 51 (7th Cir. 1975), involved a rent increase in a housing project subsidized under Section 221(d)(3), which created an assistance program similar to the Section 8 program. In determining that Section 221(d)(3) did not create an entitlement to a certain rent level, Judge Hufstedler emphasized that Congress did not "gear rent levels to the budgets of individual tenants" but, instead, authorized the Secretary to set rent levels based upon several factors. She also noted that Section 221(d)(3) was not enacted as a direct financial assistance program for tenants and that the program was directed more "to benefiting the class of low and middle income housing consumers than it (was) to benefiting any specific tenants." Geneva Towers, 504 F.2d at 497.

But this analysis, which also underlies Harlib, supports rather than contradicts the existence of a legitimate claim of entitlement in the instant case. Here the rent subsidies are fashioned to fit the budgets of individual tenants. Section 8 was designed to benefit specific tenants by providing them with monthly rental subsidies meeting their particularized needs. Once a family is selected to receive Section 8 assistance, the only factors that determine the level of assistance the family is to receive are the monthly rental charge for the unit and the family's financial circumstances. Thus, in contrast to the Section 221(d)(3) program, award of Section 8 benefits is geared to the rental assistance needs of particular tenants.^[39]

The existence of owner discretion in the certification process does not suggest a different conclusion. Although the owner may have limited discretion with regard to the initial selection of tenants who are to be subsidized under the Contracts, see note 12, supra, the owner may properly exercise no discretion with regard to retroactive certification, see pages 1274-76, supra. Indeed, it is the apparent decision by HUD to give owners the unreviewable right to decide whether a certified tenant will receive retroactive benefits that offends the concepts of fairness and nonarbitrariness which are at the heart of the constitutional requirement of due process of law.

3. What Process is Due?

Since appellants have a legitimate claim of entitlement to retroactive housing [1280] assistance payments, we must remand to the district court to determine what process may be due. Due process does not have a fixed content unrelated to time, place and circumstances. Cafeteria & Restaurant Workers v. McElroy, 367 U.S. 886, 895, 81 S.Ct. 1743, 1748, 6 L.Ed.2d 1230 (1961). Instead, it is a flexible concept that requires such procedural protections as the particular situation demands. Greenholtz v. Inmates of Nebraska Penal & Correctional Complex, 442 U.S. 1, 99 S.Ct. 2100, 60 L.Ed.2d 668 (1979); Morrissey v. Brewer, 408 U.S. 471, 481, 92 S.Ct. 2593, 2600, 33 L.Ed.2d 484 (1972). As the Supreme Court has emphasized:

The function of the legal process, as that concept is embodied in the Constitution, and in the realm of factfinding, is to minimize the risk of erroneous decisions. Because of the broad spectrum of concerns to which the term must apply, flexibility is necessary to gear the process to the particular need; the quantum and quality of the process due in a particular situation depend upon the need to serve the purpose of minimizing the risk of error.

Greenholtz, 442 U.S. at 13, 99 S.Ct. at 2107 (citing Mathews v. Eldridge, 424 U.S. 319, 335, 96 S.Ct. 893, 903, 47 L.Ed.2d 18 (1976)).

To determine what process is appropriate, the countervailing interests of appellants and HUD must be balanced.^[40]

(I)dentification of the specific dictates of due process generally requires consideration of three distinct factors: First, the private interest that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.

Mathews v. Eldridge, 424 U.S. 319, 335, 96 S.Ct. 893, 903, 47 L.Ed.2d 18 (1976).^[41]

The hardship upon tenants here consists in their being deprived, in their necessitous circumstances, of housing assistance benefits for periods as long as seven months. In this regard, the Supreme Court has recognized that "the possible length of wrongful deprivation of . . . benefits is an important factor in assessing the impact of official action on the private interests." Mathews, 424 U.S. at 341, 96 S.Ct. at 905 (citing Fusari v. Steinberg, 419 U.S. 379, 389, 95 S.Ct. 533, 539, 42 L.Ed.2d 521 (1975)).

On the other hand, the fiscal and administrative burdens of elaborate procedural requirements could become relatively onerous in comparison with the private interests sought to be benefited. In this case, however, the burden of providing procedural safeguards regarding the provision of retroactive payments to already certified tenants would appear to be insubstantial. We note that HUD has already provided notice, hearing and appeal procedures for applicants under Section 8 subprograms that involve public housing authorities. See, e. g., 24 C.F.R. § 881.603(b)(3) (1980) (substantially rehabilitated housing). See also Ressler v. Landrieu, No. A77-228 (D.Alas. November 21, 1980) (requiring HUD to establish tenant selection standards, waiting lists, and notice, hearing and review procedures with regard to the selection of tenants to be certified under the Section 8 subprogram for projects with HUD-insured mortgages).

It is a sine qua non that all tenants receive prompt notification of their right to receive such payments retroactively. See [1281] Memphis Light, Gas & Water Division v. Craft, 436 U.S. 1, 98 S.Ct. 1554, 56 L.Ed.2d 30 (1978). Due process would also seem to require that the tenants receive a written statement setting forth the reasons for any denial of retroactive benefits and the opportunity to challenge the sufficiency of HUD's reasons. See Perry v. Sindermann, 408 U.S. 593, 92 S.Ct. 2694, 33 L.Ed.2d 570 (1972); Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 657, 94 L.Ed. 865 (1950); T. A. Moynahan Properties, Inc. v. Lancaster Village Cooperative, Inc., 496 F.2d 1114, 1118 (7th Cir. 1974); Brezina v. Dowdall, 472 F.Supp. 82, 85 (N.D.Ill.1979). In addition, appellants must receive some sort of hearing before retroactive benefits are finally denied, since the "fundamental requirement of due process is the opportunity to be heard at a meaningful time and in a meaningful manner." Mathews v. Eldridge, 424 U.S. at 333, 96 S.Ct. at 901 (citing Armstrong v. Manzo, 380 U.S. 545, 552, 85 S.Ct. 1187, 1191, 14 L.Ed.2d 62 (1965)). See also Memphis Light, Gas & Water Division v. Craft, 436 U.S. at 16, 98 S.Ct. at 1564. On remand, the district court should determine the precise contours of the requirements of procedural due process in the context of this case, giving whatever regard is appropriate to the contract remedy we have provided to presently certified tenants.^[42]

REVERSED and REMANDED for further proceedings in accordance with this opinion.

[*] The Honorable John F. Kilkenny, Senior Circuit Judge of the Ninth Circuit Court of Appeals, is sitting by designation.

[1] The class certified in Count II includes all families in Wisconsin who resided in certain dwelling units when Section 8 Contracts were executed between HUD and the owners of these dwelling units and who were certified for housing assistance payments pursuant to these Contracts, but who did not receive the benefit of payments as of the effective dates of the Contracts.

[2] The class certified in Count III includes all families in Wisconsin who resided or will reside in dwelling units when Section 8 Contracts were executed or will be executed between HUD and the owner of these dwelling units and who were certified or will be certified pursuant to these Contracts for housing assistance payments, but who did not or will not receive the benefit of such payments as of the effective dates of the Contracts.

[3] After the instant appeal was filed, plaintiffs orally moved (on the basis of Pitt's certification of Holbrook and tender of full payment of claimed retroactive payments) to dismiss defendant Pitt from the appeal, and this motion was granted.

[4] At the time the Contract between HUD and Pitt was executed, Holbrook paid $182.03 per month in rent; she also paid for electric service. Her total housing costs allegedly consumed nearly 50 percent of her monthly income. Under the Section 8 program she was entitled to subsidies from HUD that would limit her housing costs to 25 percent of her monthly income.

[5] With respect to the Contracts executed between 1976 and 1979 between HUD and the forty-nine multifamily project owners in Wisconsin, HUD made housing assistance payments on behalf of 1,736 certified families, who are members of the class certified in Count II. Of these, 336 families (19.3 percent) waited longer than ninety days after the effective dates of their respective Contracts to be certified and to receive initial housing assistance payments, including Holbrook and twelve other families at Main Street Gardens. An additional 188 families (10.8 percent) waited sixty days to receive payments and 772 families (44.5 percent) waited less than thirty days. The record is unclear concerning the delay in initial payments for the remaining 440 certified families (25.4 percent).

Implementation of Contracts at the following projects illustrates the inconsistent manner in which HUD initiated housing assistance payments on behalf of certified families:

(a) At West View Apartments:

i. the effective date of the Contract was December 1, 1976;

ii. the initial claim for housing assistance payments was submitted by the owner to HUD on November 23, 1976;

iii. HUD made housing assistance payments effective December 1976.

(b) At Watertown East I:

i. the effective date of the Contract was December 13, 1977;

ii. the initial claim for housing assistance payments was submitted by the owners on June 9, 1978;

iii. HUD made housing assistance payments effective June 1978; no retroactive payments to cover the period from December to June were made since none were requested by the project owner.

(c) At Meadow Village:

i. the effective date of the Contract was October 21, 1977;

ii. the initial claim for housing assistance payments was submitted by the owner on June 20, 1978;

iii. HUD made retroactive housing assistance payments to cover the period from October to June since the tenants here were certified for retroactive benefits by the project owner.

[6] These programs include, inter alia, the Housing Act of 1949, ch. 338, 63 Stat. 413 (codified in scattered sections of 12, 42 U.S.C.), the Housing Act of 1961, Pub.L. 87-70, 75 Stat. 149 (codified in scattered sections of 12, 42 U.S.C.), the Housing and Urban Development Act of 1965, Pub.L. 89-117, 79 Stat. 451 (codified in scattered sections of 12, 15, 20, 38, 40, 42, 49 U.S.C.), the Housing and Urban Development Act of 1968, Pub.L. 90-448, 82 Stat. 476, (codified in scattered sections of 42 U.S.C.), and the Housing and Community Development Act of 1974, Pub.L. 93-383, 88 Stat. 633 (codified in scattered sections of 5, 12, 20, 31, 40, 42, 49 U.S.C.).

Many of these programs were enacted because of the perceived failure of existing legislation to provide decent housing for lower income families. The Housing and Urban Development Act of 1968, for example, which set ambitious goals for the preservation of existing housing as well as the creation of additional housing through construction and rehabilitation, included the congressional finding that the supply of housing was not increasing rapidly enough to realize "the goal of [1281] a decent home and suitable living environment for every American family." 42 U.S.C. § 1441a (1976).

[7] Congress has described the Section 8 program as "the Nation's major tool for assisting the construction of lower income housing." S.Rep. No. 94-749, 94th Cong., 2nd Sess. 3, reprinted in (1976) U.S.Code Cong. & Ad.News 1885, 1887. See also S.Rep.No. 93-693, 93rd Cong., 2nd Sess., reprinted in (1974) U.S.Code Cong. & Ad.News 4273 et seq.

[8] Under the Section 8 program, the monthly rent an owner may charge is generally limited to 110 percent of the fair market rental of the units. 42 U.S.C. § 1437f(c)(1) (Supp. III 1979). Eligible families are required to pay not more than 25 percent of their income for rent (or 15 percent in the case of certain tenants). 42 U.S.C. § 1437f(c)(3) (1976). The difference between the amount payable by eligible families and the total rental amount due to the owner is the amount subsidized by HUD in the form of housing assistance payments. Owners do not receive an increase in rental income as the result of Section 8 Contracts. Rather, the rent payable by each certified tenant is apportioned between the tenant and HUD based on both the tenant's income and family size.

Pursuant to § 202 of the Housing and Community Development Amendments of 1979, 42 U.S.C. § 1437f(c)(3) (Supp. III 1979) was amended to increase the tenant's share of the rent to a maximum of 30 percent of income. However, tenants currently in occupancy are exempt from this increase.

[9] 12 U.S.C. § 1715z-1(a) (1976) sets forth the purpose of the Section 236 program:

For the purpose of reducing rentals for lower income families, the Secretary is authorized to make, and to contract to make, periodic interest reduction payments on behalf of the owner of a rental housing project designed for occupancy by lower income families, which shall be accomplished through payments to mortgagees holding mortgages meeting the special requirements specified in this section.

Tenants residing in Section 236 developments are required to pay, as rent, the greater of either one-fourth of their monthly income, as defined, or a "basic rental charge determined on the basis of operating the project with (the Section 236 mortgage interest subsidies)." 12 U.S.C. § 1715z-1(f)(1) (1976).

For 20 percent of the units in projects assisted by Section 236 after August 22, 1974, HUD is authorized to make "additional assistance payments to the project owner on behalf of tenants whose incomes are too low for them to afford the basic rentals . . . with 25 per centum of their income." 12 U.S.C. § 1715z-1(f)(2) (1976).

[10] HUD, Section 8 Additional Assistance Program for Projects with HUD-Insured or HUD-Held Mortgages (1976) ("Handbook").

[11] It appears that the model Contract, which is included in the Handbook as an appendix, was used as the actual Contract for every agreement, to which this case has application, between HUD and the owners under the Section 8 HUD-insured mortgage subprogram.

[12] This responsibility would only arise if, at the time certification occurs, the number of units occupied by eligible tenants is greater than the number of units authorized to be assisted under the Contract.

[13] Paragraph 1.9(c) of the Contract, which contains the basic provision pertaining to certification of eligible tenants, reads as follows:

1.9 Leasing of Units

c. Eligibility, Selection and Admission of Families.

(1) The Owner shall be responsible for determination of eligibility of applicants, selection of families from among those determined to be eligible, and computation of the amount of housing assistance payments on behalf of each selected Family in accordance with schedules and criteria established by the Government.

[14] Contracts may be executed for an initial period of up to five years, renewable for successive five year terms by agreement between the owner and HUD. The total Contract term cannot exceed fifteen years. 24 C.F.R. § 886.111 (1980).

[15] Paragraph 1.11(a) of the Contract provides as follows:

1.11 Reduction of Number of Contract Units for Failure to lease to Eligible Families

a. After First Year of Contract.

If at any time, beginning six months after the effective date of this Contract, the Owner fails for a continuous period of six months to have at least 80 percent of the Contract Units leased or available for leasing by Families, the Government may on 30 days notice reduce the number of Contract Units to not less than the number of units under lease or available for leasing by Families, plus 10 percent of such number if the number is 10 or more, rounded to the next higher number.

This provision is an incentive to project owners to lease Contract units to eligible lower income families. There is no other express requirement for owners, detailed in the Contract, concerning either certification of eligible families within any specific time period or retroactive certification to the Contract date.

[16] Federal common law applies to plaintiffs' third-party beneficiary claims since a federal agency is a party to the action and since the outcome of this case will directly affect substantial financial obligations of the United States. See United States v. Standard Oil Co., 332 U.S. 301, 67 S.Ct. 1604, 91 L.Ed. 2067 (1947); Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943). Miree v. DeKalb County, 433 U.S. 25, 97 S.Ct. 2490, 53 L.Ed.2d 557 (1977), does not suggest a contrary result. The Court in Miree held that state and not federal common law applied to third-party beneficiary claims arising out of a contract between the Federal Aviation Administration and DeKalb County. Central to the Court's holding, however, was the fact that the United States, although a party to the contract, was not named as a defendant in the breach of contract claim. Therefore, in sharp contrast with the case before us, only the rights of private litigants were at issue, and resolution of the dispute would have had "no direct effect upon the United States or its Treasury." Id. at 29, 97 S.Ct. at 2493.

We note, however, that our result as to the third-party beneficiary claim would be the same if analyzed under Wisconsin law. See Mercado v. Mitchell, 83 Wis.2d 17, 264 N.W.2d 532 (1978); Schell v. Knickelbein, 77 Wis.2d 344, 252 N.W.2d 921 (1977); In re Bratt, 257 Wis. 447, 43 N.W.2d 817 (1950).

[17] Consistent with the scheme set forth in the Restatement of Contracts § 133 (1932), most court decisions have recognized three classes of third-party beneficiaries donee, creditor and incidental with different rules governing the rights of each class. It has been suggested, for example, that a contracting party's "intent to benefit" a third party is relevant if the third party is viewed as a donee beneficiary, but not if the third party is viewed as a creditor beneficiary. Isbrandtsen Co. v. Local 1291, Int'l Longshoremen's Ass'n, 204 F.2d 495, 497 n.11 (3d Cir. 1953).

We decline to follow this approach, since it fails to focus on the central interpretative question involved in third-party beneficiary problems: did the contracting parties intend that the third party benefit from the contract? We prefer the approach of the Restatement (Second) of Contracts § 133 (Tent. Draft No. 4, 1968), which divides beneficiaries into two classes intended and incidental. Section 133 provides:

(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either

(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or

(b) the promisee manifests an intention to give the beneficiary the benefit of the promised performance.

(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.

We also decline to adopt the Restatement's position to the extent it may suggest that only the intentions of the "promisee" (the party through whom the beneficiary claims) and not the "promisor" (the party obligated to render performance that benefits the third party) are relevant to a determination of the third-party beneficiary's rights. Contracts are the product of shared intentions, and a promisor should be bound only by those objectively manifested intentions of the promisee to which the promisor has implicitly or explicitly assented. It is improper to neglect the reasonable expectations of the promisor, since the burden of the agreement to the promisor, and therefore the consideration he will require, may vary according to the number of parties who have enforceable rights under the contract. See generally Jones, Legal Protection of Third Party Beneficiaries: On Opening Courthouse Doors, 46 Cinn.L.Rev. 313 (1977).

[18] We believe the legislative history and purpose of the Section 8 program may properly be used to interpret the parties' intentions. It is evident from the terms of the Contract that HUD, in executing the Contract, is acting to fulfill the objectives of the Section 8 program. The Contract itself is entitled "Section 8 Housing Assistance Payments Program" and Part I of the Contract expressly states that the "contract is entered into pursuant to the United States Housing Act of 1937." Cf. Inglewood v. Los Angeles, 451 F.2d 948, 955 (9th Cir. 1972); Feir v. Carabetta Enterprises, Inc., 459 F.Supp. 841, 848 n.3 (D.Conn.1978).

[19] It is instructive to compare Section 8 with Section 201 of the Housing and Community Development Amendments of 1978, 12 U.S.C. § 1715z-1a (Supp. III 1979), which was designed to assist financially troubled multifamily projects. Eligibility under Section 201 does turn on the likelihood that assistance will "restore or maintain the financial soundness of the project," 12 U.S.C. § 1715z-1a(d)(1) (Supp. I 1978), and the level of Section 201 assistance is based on the project's financial circumstances, not the tenants' incomes and rental assistance needs. 12 U.S.C. § 1715z-1(f) (Supp. III 1979).

[20] The only priority for acceptance of Contract applications set forth in the statute is geared toward realizing the Section 8 program's second express purpose of promoting economically integrated housing. Under 42 U.S.C. § 1437f(c)(5) (1976), the Secretary "may give preference to applications for assistance involving not more than 20 per centum of the dwelling units in a project."

[21] Handbook, supra note 10 at 1. In similar fashion, a HUD-prepared model letter sent to owners of HUD-insured projects provides:

This is to advise you that Section 8 project commitments are available for those projects with HUD-insured or HUD-held mortgages . . . which are likely to benefit most substantially from Section 8 assistance. Commitments will be made based upon HUD's approval of a project owner's request for participation in the program.

The Section 8 program is designed to assist lower-income residents by bringing their rents down to a level that they can afford, and to provide financial stability to housing projects which serve the needs of lower-income families by increasing the market for their units. Section 8 assistance can also help by assuring that needed rent increases can be implemented without forcing out those families needing such units. The Section 8 contract can cover up to 100 percent of the units and ties the subsidy to the project, not the individual residents. The eligible families and individuals in these projects will pay between 15 percent and 25 percent of income for rent. The difference between the tenant's share and the HUD-approved rent for the unit occupied will represent the amount of the assistance payment for that family or individual.

Handbook, supra note 10 at Appendix 3.

[22] We note in this regard that the Senate Banking, Housing and Urban Affairs Committee's Report on the Housing Authorization Act of 1976 disapproved of HUD's efforts to direct Section 8 funds toward financially troubled FHA-insured projects:

The Committee recognized the merits of HUD's plan to help these projects, but disagreed with HUD's use of Section 8 funds for this purpose because it detracts from the basic intent of Congress that such funds be used to provide additional housing units for low and moderate income families.

S.Rep.No.94-749, 94th Cong., 2nd Sess. 12, reprinted in (1976) U.S.Code Cong. and Ad.News 1896 (emphasis supplied).

[23] We believe that the status of appellants as third-party beneficiaries is not defeated by the fact that they are not specifically named in the Contracts, since they are identified at the time performance is due, i. e., when certification occurs. See Owens v. Haas, 601 F.2d 1242, 1250 (2d Cir.), cert. denied, 444 U.S. 980, 100 S.Ct. 483, 62 L.Ed.2d 407 (1979); Safer v. Perper, 569 F.2d 87, 92 (D.C.Cir.1977); Avco Delta Corp. v. United States, 484 F.2d 692, 702 (7th Cir. 1973), cert. denied, 415 U.S. 931, 94 S.Ct. 1444, 39 L.Ed.2d 490 (1974); United States v. California State Automobile Ass'n, 385 F.Supp. 669, 672 (E.D.Cal.1974), aff'd, 530 F.2d 850 (9th Cir. 1976); Bethune v. United States Department of Housing and Urban Development, 376 F.Supp. 1074 (W.D.Mo.1972); 4 A. Corbin, supra, § 781 at 70.

[24] We agree with the district court that the tenants, as third-party beneficiaries, are bound by the terms and conditions of the Contracts. See Holbrook v. Pitt, 479 F.Supp. at 993. See also Trans-Bay Engineers and Builders, Inc. v. Hills, 551 F.2d 370, 378 (1976); Rotermund v. United States Steel Corp., 474 F.2d 1139, 1142 (8th Cir. 1973).

[25] It is appropriate for courts to supply contract terms requiring performance within a reasonable time where such terms are necessary to fulfill the purposes of the contract. See Trailmobile Co. v. Whirls, 331 U.S. 40, 54-55, 67 S.Ct. 982, 989-990, 91 L.Ed. 1328 (1947); Boyd Construction Co. v. T. L. James & Co., 477 F.2d 34, 35 (5th Cir. 1973); Seaboard Coast Line Railroad Co. v. Long Island Rail Road Co., 447 F.Supp. 108, 114 (E.D.N.Y.), aff'd, 595 F.2d 96 (2d Cir. 1978).

[26] Once owners did submit certifications, however, HUD was liable for the failure to provide retroactive benefits to tenants, since the owner should no longer have had any meaningful discretion with regard to the computation of the amount of the payments to be made on behalf of the tenants. As discussed below, we believe HUD improperly allowed owners to exclude retroactive benefits from their computations.

[27] The district court apparently concluded that the tenants were bound by the failure of their project owners to submit retroactive certifications to HUD. But we think the binding effect of the owners' nonfeasance must be drastically tempered by the economic realities of the transactions. The owners have no economic stake in retroactive certification (except to the extent which the record does not disclose that accumulated financial burdens might force tenants sooner or later to default in rent payments). Indeed, the benefit of retroactive certification is almost entirely to the tenants. Thus, there is no direct financial incentive to owners to perform certifications in a way which will be advantageous to tenants. We think the purpose of the Contracts to assist tenants, who may be paying as much as 50 percent of their income for shelter expenses, ought not to be frustrated by the owners' failure to perform financially profitless acts. To accord weight, in this regard, to the owners' discretion is to convert the statutory scheme into a game of chance.

[28] By segregating funds exclusively to pay rent subsidies on behalf of particular tenants, HUD has created an identifiable res to which the tenants have a claim in the nature of the equitable lien imposed in Bennett Construction Co. v. Allen Gardens, Inc., 433 F.Supp. 825 (W.D.Mo.1977).

Bennett Construction involved the rights of a general contractor a third-party beneficiary to enforce the terms of a construction loan agreement between HUD as assignee of a mortgage and a mortgagor project owner in default. The general contractor had completed construction and was owed certain undisbursed loan proceeds. Bennett Construction is like the instant case in that the mortgagor through whom the general contractor claimed was assertedly not entitled to performance in two respects: (1) it had not gone to final closing of the construction loan and (2) it was in default. These defects are analogous to the failure of the project owners in the instant case to certify tenants retroactively. Bennett Construction is, however, unlike the instant case in that the general contractor there was a creditor third-party beneficiary, and failure to impress the undisbursed loan proceeds with an equitable lien would have resulted in the unjust enrichment of HUD. "Unjust enrichment" is only at issue here to the extent that HUD might be said to be "enriched" by the opportunity to retain set-aside funds and to the extent that it is "unjust" to deny retroactive benefits to tenants who may have reasonably relied on receiving them.

In any case, Bennett Construction and the instant case are similar in that (1) there is an identifiable res (in Bennett Construction the undisbursed loan proceeds and here the set-aside funds) and (2) HUD in both cases is the "guiding spirit" and the dominant force. In Bennett Construction, the mortgagor owner was the "creature of HUD", 433 F.Supp. at 835. Here the project owners have (or should have) no meaningful discretion regarding the decision to pay retroactive benefits. Based on these similarities we think there are persuasive reasons for regarding the funds set aside by HUD as impressed with a lien dictated by the policy of the Section 8 program in favor of the tenants from the execution dates of the Contracts. It is unjust to deny tenants the funds set aside specifically for their benefit solely because of the capricious decisions of their project owners not to make their certifications retroactive.

[29] See note 12, supra.

[30] Indeed, the question of retroactive certification often becomes important only if the owner breaches his obligation to promptly certify tenants. As the record in this case demonstrates, it is often possible for owners to certify tenants by the effective dates of their Contracts. See note 5, supra. In such cases, an owner would have the opportunity to choose whether tenants are to receive retroactive benefits only if he failed to promptly certify the tenants in the first instance. It is unreasonable to assume that the parties intended for the owner to have such a choice when the choice exists only because of the owner's initial breach of his contractual obligation of prompt certification.

[31] The class designated in Count III would appear to include Wisconsin tenants who will be certified in the future under existing Contracts. In their brief on appeal, however, appellants assert that "all class members claiming entitlements to housing assistance payments as of the effective dates of the respective Section 8 Contracts have already been certified and received benefits under the contracts." Appellant's brief at 30 (emphasis supplied).

On remand, the district court should determine whether due process protection should be extended to tenants certified in the future or whether appellants have waived such a claim.

[32] In their amended complaint, appellants also requested declaratory and injunctive relief under the due process clause ordering the Secretary to amend the Contracts to require certification of tenants and initiation of benefits within thirty days. This relief was denied by the district court.

On appeal, appellants no longer seek this relief because of HUD's representation that it does not intend to execute any additional Contracts in Wisconsin. We therefore express no opinion on the merits of these claims.

We also note that our decision to provide appellants with due process protection regarding the decision to award retroactive benefits is largely superfluous, since we have decided that tenants have enforceable rights to retroactive benefits as beneficiaries under the Contracts. It would certainly be inappropriate for us to engage in unnecessary constitutional adjudication. See Ruslan Shipping Corp. v. Coscol Petroleum Corp., 635 F.2d 648 at 650 (7th Cir. 1980).

We reach the due process claims, however, since appellants may want to invoke their due process rights if HUD does not promptly tender the full amount of retroactive benefits. Even if HUD does tender these benefits to existing tenants, tenants certified in the future under existing Contracts may be entitled to due process protection, since their rights as beneficiaries will not have been reduced to judgment at the time they are certified. But see note 31, supra.

[33] In response to the need for insuring that government programs are not administered in an arbitrary or irrational fashion, courts have extended due process protections to a wide variety of governmentally conferred benefits. See, e. g., Greenholtz v. Inmates of Nebraska Penal & Correctional Complex, 442 U.S. 1, 99 S.Ct. 2100, 60 L.Ed.2d 668 (1979) (parole application); Willner v. Committee on Character & Fitness, 373 U.S. 96, 83 S.Ct. 1175, 10 L.Ed.2d 224 (1967) (application for bar admission); Wright v. Califano, 587 F.2d 345, 354 (7th Cir. 1978) (social security benefits); Freitag v. Carter, 489 F.2d 1377 (7th Cir. 1973) (chauffeur's license application); Holmes v. New York City Housing Authority, 398 F.2d 262 (2d Cir. 1968) (public housing application).

As court decisions have extended the notion of protected rights under the due process clause beyond traditional concepts of "liberty" and "property," however, it is often difficult to discern the boundaries of due process protection. Compare Geneva Towers Tenants Organization v. Federated Mortgage Investors, 504 F.2d 483 (9th Cir. 1974), with Geneva Towers, 504 F.2d at 494 (Hufstedler, J., dissenting) and Harlib v. Lynn, 511 F.2d 51 (7th Cir. 1975).

[34] Indeed, HUD does not dispute that certified tenants have a legitimate claim of entitlement. Its brief on appeal states:

In this case, a property interest did not arise until the owners certified plaintiffs as being eligible to participate in the Section 8 program. Prior to certification plaintiffs had merely an inchoate property interest. Only after certification by the owner did a property interest become choate. Therefore, plaintiffs' subjective expectancy is not constitutionally protected by the due process clause.

Thus, at most HUD challenges only the scope or magnitude of entitlement of certified tenants (i. e., whether the entitlement extends to retroactive benefits).

[35] At a minimum, the nature of the appellants' entitlement claim must be deemed to be that of applicants for retroactive benefits. Applicants who have met the objective eligibility criteria of a wide variety of governmental programs have been held to be entitled to protection under the due process clause. See, e. g., Greenholtz v. Inmates of Nebraska Penal & Correctional Complex, 442 U.S. 1, 99 S.Ct. 2100, 60 L.Ed.2d 668 (1979) (parole applicant); Willner v. Committee on Character & Fitness, 373 U.S. 96, 83 S.Ct. 1175, 10 L.Ed.2d 224 (1967) (bar applicant); Griffeth v. Detrich, 603 F.2d 118 (9th Cir. 1979), cert. denied, 445 U.S. 970, 100 S.Ct. 1348, 64 L.Ed.2d 247 (1980) (general assistance applicants); Larry v. Lawler, 605 F.2d 954 (7th Cir. 1978) (federal employment applicant); Carey v. Quern, 588 F.2d 230 (7th Cir. 1978) (general assistance applicants); Wright v. Califano, 587 F.2d 345, 354 (7th Cir. 1978) (social security applicants); White v. Roughton, 530 F.2d 750 (7th Cir. 1976) (general assistance applicants); Freitag v. Carter, 489 F.2d 1377 (7th Cir. 1973) (chauffeur's license applicants); Like v. Carter, 448 F.2d 798 (8th Cir. 1971), cert. denied, 405 U.S. 1045, 92 S.Ct. 1309, 31 L.Ed.2d 588 (1972) (AFDC applicants); Holmes v. New York City Housing Authority, 398 F.2d 262 (2d Cir. 1968) (public housing applicants); Meyer v. Niles Township, 477 F.Supp. 357, 361-62 (N.D.Ill.1979) (general assistance applicants); Davis v. United States, 415 F.Supp. 1086 (D.Kan.1976) (worker's compensation applicant); Alexander v. Silverman, 356 F.Supp. 1179 (E.D.Wis.1973) (general relief applicant); Neddo v. Housing Authority of Milwaukee, 335 F.Supp. 1397 (E.D.Wis.1971) (public housing applicant); Custom v. Trainor, 74 F.R.D. 409 (N.D.Ill.1977) (general assistance applicants).

[36] Although Ferguson and Watkins involved termination of certificates of family participation in a Section 8 subprogram, a similar analysis applies to the denial of housing assistance payments in the first instance. In Wright v. Califano, 587 F.2d 345, 354 (7th Cir. 1978), this court concluded that "denials (of benefits) do not necessarily deserve less due process than terminations."

[37] The district court stated:

HUD argues that a property interest in Section 8 benefits does not arise until the owner certifies a family as eligible to receive such benefits. Prior to certification, HUD contends that the plaintiffs have an inchoate property interest, which is merely a subjective expectancy not entitled to any due process protection. I agree.

Holbrook v. Pitt, 479 F.Supp. at 994.

[38] Future tenants obviously have a legitimate claim of entitlement only with respect to benefits for the months during which they rented units.

[39] Judge Hufstedler determined that a governmentally conferred benefit constitutes a constitutionally cognizable claim of entitlement if the initial receipt or the termination of the benefit is conditioned on the "existence of a controvertible and controverted fact." Geneva Towers, 504 F.2d at 495. This requirement "serves the practical side of due process, since a hearing and notice would be 'pointless' if there were no such facts to resolve." Uneeda Davis v. Ball Memorial Hospital Association, 640 F.2d 30, at 41 (7th Cir. 1980).

In the present case, it is clear that appellants have an entitlement claim under Judge Hufstedler's definition. Since they are certified, their eligibility to receive Section 8 benefits has been established, and their owners have selected them specifically as the tenants who are to receive payments under the Contracts. Also, by the terms of the Contracts, HUD has already committed sufficient funds to provide assistance payments to the tenants from the effective dates of the Contracts. The tenants' receipt of retroactive benefits is therefore conditioned solely upon the owners' certification of the tenants for retroactive benefits (and we have held, in effect, that this retroactive certification cannot properly be withheld). The single factual determination that may be required, therefore, is whether, during the period for which the retroactive benefits would be paid, the tenants' incomes exceeded the maximum income limits set forth in the statute, 42 U.S.C. § 1437f(c)(4), 1437f(f)(1) (1976), and in the regulations, 24 C.F.R. § 886.102, 886.109, and 886.117 (1980).

[40] See, e. g., Goss v. Lopez, 419 U.S. 565, 579, 95 S.Ct. 729, 738, 42 L.Ed.2d 725 (1975); Carey v. Quern, 588 F.2d 230, 232 (7th Cir. 1978); Winston v. United States Postal Service, 585 F.2d 198, 209 (7th Cir. 1978); Klein v. Mathews, 430 F.Supp. 1005, 1008 (D.N.J.1977).

[41] Accord, Ingraham v. Wright, 430 U.S. 651, 97 S.Ct. 1401, 51 L.Ed.2d 711 (1977); Winston v. United States Postal Service, 585 F.2d 198, 200 (7th Cir. 1978).

[42] On remand, the district court may also decide to fashion due process protection for tenants who will be certified in the future. See note 31, supra.

283 Ill. App. 325

Scott Ford, Appellee,
v.
The Mutual Life Insurance Company of New York, Appellant.

Gen. No. 8,996.

Appeal by defendant from the Circuit Court of Knox county; the Hon. LOREN E. MURPHY, Judge, presiding. Heard in this court at the October term, 1935. Reversed and judgment entered here. Opinion filed January 17, 1936.

FREDERICK L. ALLEN, WINSTON, STRAWN & SHAW, of Chicago, and MILLER, ELLIOTT & WESTERVELT, of Peoria, for appellant; GEORGE T. EVANS, of Chicago, and EUGENE R. JOHNSON, of Peoria, of counsel.

R. D. ROBINSON, of Galesburg, for appellee; PHILLIP BENJAMIN ROBINSON, of counsel.

[326] MR. JUSTICE WOLFE delivered the opinion of the court.

In an action of assumpsit the plaintiff secured a verdict and judgment against the defendant for $2,149.33 which the evidence shows was the cash surrender value of a policy of insurance issued by the defendant on the life of the plaintiff, in which the plaintiff's wife is named the beneficiary. The declaration of one count is based on the surrender clause of the policy. As one of its defenses, the defendant interposed the plea of the statute of limitations. The other pleas of the defendant raise the issue as to whether the plaintiff had the legal right to surrender the policy and collect its cash surrender value without the consent of the beneficiary. It is conceded that the beneficiary has not consented to the surrender of the policy to the defendant. If the plaintiff did not have the right to surrender the policy and collect the cash surrender value, without the consent of the beneficiary, no right of action has ever accrued in favor of the plaintiff for the surrender value of the policy. If this court holds that the statute of limitations has run against the action of the plaintiff, it must have necessarily decided that his right of action accrued without the consent of the beneficiary to so surrender the policy. Whether the statute of limitations is applicable depends in any event upon a determination of the question presented by the pleas going to the merits of the plaintiff's claim. This was a question of law, dependent upon the construction of the policy, which was presented to the trial court by appropriate motions at the close of all the evidence.

The application for the policy was signed by the plaintiff on August 24, 1896, at Galesburg, Illinois, where the plaintiff lived. The policy is dated September 3, 1896, and it was delivered by the defendant to the plaintiff at Galesburg. The defendant is incorporated under the laws of the State of New York [327] where applications for life insurance policies are passed upon and issued by the defendant. The application for the policy contains the following provision:

"This application made to the Mutual Life Insurance Company of New York is the basis and a part of a proposed Contract of Insurance, subject to the Charter of the Company and the laws of the State of New York."

By this stipulation, the proposed contract of insurance became consummated and completed upon the issuance of the policy, and the plaintiff and the defendant mutually agreed that the contract should be a New York contract and construed according to the laws of that State. Subject to limitations hereafter stated, the statutory provisions of the State of New York and the decisions of the highest court of that State as to the construction of such a contract and of the statutes of New York must therefore be accepted as conclusive upon the parties. Banholzer v. New York Life Ins. Co., 178 U. S. 402, 44 L.Ed. 1124, and Hayward v. Sencenbaugh, 141 Ill. App. 395. The above stipulation is subject to limitations or conditions among which may be mentioned, that the laws of the State of New York must give way if they are in conflict with express and valid terms of the policy; further, the stipulation does not avoid statutory provisions of the State of Illinois, governing life insurance contracts, enacted for the protection of its citizens. (Mutual Life Ins. Co. v. Hill, 193 U. S. 551, 48 L.Ed. 788; Albro v. Manhattan L. Ins. Co., 119 Fed. 629, certiorari denied 194 U.S. 633; State Life Ins. Co. v. Westcott, 166 Ala. 192, 52 So. 344; Mutual Life Ins. Co. v. Mullan, 107 Md. 457, 69 Atl. 385; Cravens v. New York Life Ins. Co., 178 U.S. 389, 44 L.Ed. 1116, affirming 148 Mo. 583, 50 S. W. 519, 71 Am. St. Rep. 628.)

The policy on its face recites as follows:

"Annual Premium for 20 years, $71.60. In consideration on the application for this policy, which is hereby made a [328] part of this contract, The Mutual  Life Insurance Company of New York promises to pay at its Home Office in the City of New York, unto Caroline Ford wife of Scott Ford of Galesburg in the County of Knox State of Illinois, her executors, administrators or assigns, Two Thousand Dollars, upon acceptance of satisfactory proofs at its Rome Office of the death of the said Scott Ford during the continuance of this policy, upon the following condition; and subject to the provisions, requirements and benefits stated on the back of this policy, which are hereby referred to and made a part hereof."

The condition mentioned is that,

"The annual premium of Seventy-one Dollars and Sixty Cents, shall be paid in advance on the delivery of this policy, and thereafter to the Company, at its Home Office in the City of New York, on the Third day of September in every year during the continuance of this contract, until premiums for Twenty full years shall have been duly paid to said Company."

The benefits referred to on the face of the policy and stated on the back thereof, which are material for consideration, are as follows:

"Surrender—This policy may be surrendered to the Company at the end of the first period of twenty years, and the full reserve computed by the American Table of Mortality, and four per cent interest, and the surplus as defined above, will be paid therefor in cash."

As before stated, the full reserve of the policy computed by the American Table of Mortality, and four per cent interest, and the surplus as defined by the policy, is the amount of the verdict, $2,149.33.

Premiums called for by the policy for 20 years after the date it was issued have been duly paid by the plaintiff to the defendant. The plaintiff has had possession of the policy from the time it was issued to him by the defendant. The contract of insurance does not contain any provisions either permitting or prohibiting [329] the plaintiff from changing the beneficiary named in the policy, or surrendering the policy, either with or without the consent of the beneficiary. It is silent on those subjects. No statutory provision of the State of New York was introduced in evidence which permitted the insured in a life insurance policy to change the beneficiary thereof without the consent of the beneficiary, or to surrender the policy without the consent of the beneficiary. There are no statutory provisions in this State either permitting, or prohibiting, the insured of a life insurance policy to change the beneficiary thereof, or surrender the policy, without the consent of the beneficiary.

The evidence shows that on June 7, 1924, the beneficiary of the policy, Caroline Ford, assigned all her right, title and interest in the policy to "Caroline Ford, wife of insured, if living, if not, to Eloise Ford, birth November 12, 1897, and Pauline Ford, birth May 8, 1902 daughters of Caroline Ford, or the survivor, or the estate of the last survivor." The legality of the assignment is not involved in this case. The beneficiary and her two said daughters are living and none of them has consented to a change of beneficiary or surrender of the policy. They are not parties to this action, and do not reside in this State.

The beneficiary, the wife of the insured, had a vested right in the policy when the contract of insurance took effect. There are no terms or provisions of the policy inconsistent with this rule of law. Whitehead v. New York Life Ins. Co., 102 N.Y. 143, 6 N.E. 267; Glanz v. Gloeckler, 104 Ill. 573; Mutual Life Ins. Co. v. Allen, 212 Ill. 125; Garner v. Germania Life Ins. Co., 110 N.Y. 266, 18 N.E. 130, 1 L.R.A. 256, 37 C.J. 577; Couch's Cyc. of Ins. Law 821. Since the beneficiary had a vested interest in the policy, the plaintiff did not have the right to surrender the policy and collect its surrender value, although the policy was in the pos [330] session of the plaintiff and he had paid the premiums thereon. Fuchs v. Mutual Life Ins. Co. of New York, 164 N.Y.S. 105; New York Life Ins. Co. v. Ireland (Tex.), 17 S.W. 617, 14 L.R.A. 278; Joyce on Insurance (1897) Vol. 11, sec. 1651; Condon v. New York Ins. Co., 183 Iowa 658, 166 N.W. 452, 19 L.R.A. 649, 654.

The motion of the defendant for a directed verdict made at the close of all the evidence in the case should have been sustained by the trial court.

The judgment of the circuit court is reversed and judgment rendered in this court for the defendant.

Reversed and judgment entered here.

115 So. 389, 217 Ala. 216 - 1928
MARVIN COPELAND
v.
B.V. BEARD.
(6 Div. 986.)

[216] Supreme Court of Alabama. Jan. 26, 1928.

[217] Certiorari to Court of Appeals.

Suit by Mrs. B. V. Beard against Marvin Copeland. Judgment for plaintiff was affirmed by the Court of Appeals (115 So. 385), and defendant petitions for certiorari to review the judgment of the Court of Appeals. Writ granted. Judgment reversed, and case remanded.

T. B. Ward and J. M. Ward, both of Tuscaloosa, for appellant.

Where a party bas made a contract with another, whereby he assumes and agrees to pay the debt of said person to some stranger or third person, such contract may be rescinded at any time before such third person or stranger accepts the contract or asserts his rights thereunder. Clark & Co. v. Nelson, 216 Ala. 199, 112 So. 819; Georgia Home Ins. Co. V. Boykins, 137 Ala. 350, 34 So. 1012; Pugh Stone Co. v. Barnes, 108 Ala. 167, 19 So. 370; Carver V. Eads, 65 Ala. 190; 21 A. L. R. 462, note. Promisor may interpose, as against promisee's creditor, for whose benefit the contract was made, any defense available as between himself and the promisee, where the creditor beneficiary has not aeted in good faith upon the promise so as to alter his position. Clark & Co. v. Nelson, supra.

H. A. & D. K. ,Tones, of Tuscaloosa, for appellee.

Brief did not reach the Reporter.

BOULDIN, J. Taking the facts from the findings of the Court of Appeals, the essential question here for review on certiorari may be briefly stated thus: Where a debtor sells and conveys real and personal property, upon consideration in part that the purchaser shall assume and pay specified debts of the vendor, and, on the same day, before the creditors for whose benefit the promise is made have assented thereto, the purchaser resells and conveys the property upon consideration in part that the subpurchaser shall assume and pay the same indebtedness, and the original vendor debtor thereupon releases the original purchaser from his promise to pay, can such creditor thereafter maintain an action of assumpsit against the original purchaser?

In Clark v. Nelson, 216 Ala. 199, 112 So. 819, this court, after a review of the authorities, approved the general statement of the doctrine in cases of rescission by Mr. Williston:

"The creditor's right is purely derivative, and, if the debtor no longer has a right of action against the promisor, the creditor can have none." 1 Williston on Contracts, § 397.

After quoting from our own cases, it was said:

"We think, therefore, this court is definitely committed to the doctrine that the promisor may interpose any defense that was permissible as between himself and the original debtor, including, of course, mutual rescission of the contract so long as the creditor had not acted in good faith upon the promise so as to alter his [218] position." Clark v. Nelson, 216 Ala. 199, 112 So. 821.

The Court of Appeals takes the view that the case at bar is to be differentiated from the Nelson Case, saying (115 So. 385):

"The recent case of Clark & Co. v. Nelson, 216 Ala. 199, 112 So. 819, is based upon the rescission of the contract, before acceptance by the debtor, thereby placing the parties in statu quo. There is a vast difference between a rescission, where the property transferred as the consideration for the agreement to pay a creditor is reconveyed to the contracting debtor and a subsequent agreement to release a purchaser of the debtor's property who had agreed to pay a creditor in consideration of property transferred to him without a reconveyance of the property."

Is the distinction thus declared sound in principle?

The transaction between the debtor, his vendee, and the subvendee, whereby the latter purchased the property, assumed the obligation to pay creditors, and the debtor released the original promisor, was, as between them, a novation. It was supported by a valuable consideration, as in other cases of novation. All right of action in the promisee, the debtor, as against his promisor, the vendee, was released. Whether such release may be aptly called a rescission of the promise to pay creditors seems unimportant. As between the immediate parties to the transaction it had the same effect

When a debtor contracts with another, for a valuable consideration, to assume and pay his debt, the creditor has an election to accept or reject the new party as his debtor. He may ignore the offer and proceed to enforce all his remedies against the original debtor. Henry v. Murphy, 54 Ala. 246.

An election requires knowledge of the facts. So a suit against the original debtor without notice that another has assumed to pay it does not constitute an election to reject the agreement. Young v. Hawkins, 74 Ala. 370. An action against the promisor assuming to pay the debt is a sufficient acceptance—an election to affirm the contract made for the creditor's benefit. Carver v. Eads, 65 Ala. 191.

There is difference of view as to the status of the parties after acceptance of the agreement by the creditor. Some authorities hold that upon election to accept the benefits of the contract, he releases the original debtor. These cases proceed on idea that the contract made between the debtor and the assuming party, while binding between themselves, is, as to the creditor, an offer of novation. Several of our earlier cases quite clearly proceed on this view. The Nelson Case, in course of discussion, recognizes these decisions.

The other view is that by the contract wherein the debtor sells property in consideration that the purchaser assumes the payment of debt, the latter becomes, as between the immediate parties, the principal and the debtor a quasi surety, and the creditor, upon acceptance of the arrangement, may sue either or both. The latter view is distinctly held in People's Savings Bank v. Jordan, 200 Ala. 500, 76 So. 442; Tyson v. Austill, 168 Ala. 525, 53 So. 263; Moore v. First Nat. Bank of Florence, 139 Ala. 595, 60S6 36 So. 777.

This is the prevailing doctrine in other jurisdictions. 1 Williston on Contracts, § 393. While our cases involved directly conveyances by a mortgagor, the purchaser assuming the mortgage debt, no sound distinction exists between them and the instant case.

The question is here involved only incidentally in defining when the rights of the creditor to sue the promisor becomes fixed, and not subject to rescission or release. It is said the promisor and promisee may rescind at any time before the creditor alters his position. If bringing suit against the promisor releases the original debtor, this would clearly alter the creditor's position for the worse, if a right of rescission still exists. If such action does not release the original debtor, then the inquiry is, When is the creditor's position so altered that his rights become fixed and beyond the power of the original parties to rescind or release?

We now adopt the doctrine that by acceptance of the promise made for his benefit, and action thereon, the creditor does not release the original debtor, unless so stipulated in the contract and made known to the creditor.

Both parties invite the creditor to accept· the contract. The debtor has the benefit of the promise for his protection in case he is still required to pay. The creditor being thus invited to avail himself of the contract, we think no fair intendment can be indulged that he shall thereby take the hazard of losing his debt, if the promise so recommended proves unavailing.

Coming then to the question of when the creditor's right of action against the promisor becomes fixed, we think it properly determinable on the basic law of contracts. So long as the contract to assume is between the debtor and his promisor only, the creditor is not a party thereto.  He can become so only by his consent. At the same time, the contract, in the nature of it, is an open offer to the creditor. His assent while the offer is open is all that is required. When the minds of all parties consent to the same thing at the same time, and such consent is communicated between them, the contract is complete.

Consent in such case may be proven in the same manner as in other contracts. The consideration for the promise passing between promisor and promisee is also consideration for the completed contract between all [219] parties. The tripartite contract being consummated, it cannot be rescinded without the consent of all. It follows that the creditor's assent to the contract, made known to the promisor, who is expected to pay, is the only change of position required. But the assent must be to a promise in force at tile time the right of contract is the right to rescind or modify.

The principle of the Nelson Case, supra, is applicable to the present case. The same doctrine that the creditor must have assented while the promise remained in force is recognized in Farrell v. Anderson, 211 Ala. 239, 100 So. 205, and Moore v. First Nat. Bank of Florence, 139 Ala. 595, 606, 36 So. 777.

The case of Biddle v. Pugh, 59 N. J. Eq. 480, 45 A. 626, involved the right of the mortgagee to hold the vendee of a mortgagor after a sale to a subvendee. Successive vendees had, as between themselves and their immediate grantors, assumed the payment of the mortgage debt. It was declared that the mortgagee's "right is subject to such action as the mortgagor and purchaser may have taken to modify or rescind the contract."The first purchaser was held still bound because the mortgagor had never released him from his obligation. See, also, note 21 A. L. R. 462 et seq.

The Court of Appeals appears to hold the status quo as to ownership of the property must be restored. The ownership of the property is of no concern to the creditor except as it may affect his power to collect his debt. This turns upon an issue of fraud vel non in the transaction, as defined in the law of fraudulent conveyances. All participants in a fraud may be held to account in a proper form of action.

No such question is presented here. So far as appears, the original debtor and the subvendee, whose promise is still open to the plaintiff creditor, are solvent, able, and ready to pay the, demand. It is a case of election to sue the vendee, who, before any acceptance of his promise, conveyed the property to another, who assumed the payment of plaintiff's demand, and after the promise had released defendant from the obligation.

Writ of certiorari granted; reversed and remanded.

All the Justices concur.

215 F.2d 872 (1954)

ROUSE
v.
UNITED STATES

United States Court of Appeals, District of Columbia Circuit.

October 7, 1954.

Action by United States, which had taken assignment of F.H.A. note which was in default, to recover from purchaser who had bought house from maker to note. The United States District Court for the District of Columbia, Burnita Shelton Matthews, J., struck purchaser's defenses and granted summary judgment for plaintiff and purchaser appealed. The Court of Appeals, Edgerton, Circuit Judge, Held that where vendor paid for heating plant in house with note, guaranteed by F.H.A., and sold house to purchaser, who promised to assume liability for heating plant cost, purchaser could set up defense of vendor's fraudulent misrepresentation of condition of heating plant.

Judgment reversed and cause remanded with instructions.

Before Edgerton, Bazelon, and Washington, Circuit Judges.

EDGERTON, Circuit Judge.

Bessie Winston gave Associated Contractors, Inc., her promissory note for $1,008.37, payable in monthly installments of $28.01, for a heating plant in her house. The Federal Housing Administration guaranteed the note and the payee endorsed it for value to the lending bank, the Union Trust Company.

Winston sold the house to Rouse. In the contract of sale Rouse agreed to assume debts secured by deeds of trust and also "to assume payment of $850 for heating plant payable $28 per Mo." Nothing was said about the note.

Winston defaulted on her note. The United States paid the bank, took an assignment of the note, demanded payment from Rouse, and sued him for $850 and interest.

Rouse alleged as defenses (1) that Winston fraudulently misrepresented the condition of the heating plant and (2) that Associated Contractors did not install it satisfactorily. The District Court struck these defenses and granted summary judgment for the plaintiff. The defendant Rouse appeals.

Since Rouse did not sign the note he is not liable on it. D.C. Code 1951, §28-119; N.I.L. Sec. 18. He is not liable to the United States at all unless his contract with Winston makes him so. The contract says the parties to it are not "bound by any terms, conditions, statements, warranties or representations, oral or written not contained in it. But this means only that the written contract contains the entire agreement. It does not mean that fraud cannot be set up as a defense to a suit on the contract. Rouse's promise to "assume payment of $850 for heating plant" made him liable to Associated Contractors, Inc., only if and so far as it made him liable to Winston; one who promises to make a payment to the promisee's creditor can assert against the creditor any defense that the promisor could assert against the promisee. Accordingly Rouse, if he had been sued by the corporation, would have been entitled to show fraud on the part of Winston. He is equally entitled to do so in this suit by an assignee of the corporation's claim. It follows that the court erred in striking the first defense. We do not consider whether Winston's alleged fraud, if shown, would be a complete or only a partial defense to this suit, since that question has not arisen and may not arise.

We think the court was right in striking the second defense.

If the promisor's agreement is to be interpreted as a promise to discharge whatever liability the promisee is under, the promisor must certainly be allowed to show that the promisee was under no enforceable liability . . . . On the other hand, if the promise means that the promisor agrees to pay a sum of money to A, to whom the promisee says he is indebted, it is immaterial whether the promisee is actually indebted to that amount or at all. . . . Where the promise is to pay a specific debt. . . this interpretation will generally be the true one. ^[17]

The judgment is reversed and the cause remanded with instructions to reinstate the first defense.

Reversed and remanded.

[17] 2 Williston, Contracts §399 (Rev: Ed. 1936).

361 U.S. 459
80 S.Ct. 489
4 L.Ed.2d 442

John L. LEWIS, Henry G. Schmidt and Josephine Roche, as Trustees of the United Mine Workers of America Welfare and Retirement Fund, Petitioners,
v.
BENEDICT COAL CORPORATION. UNITED MINE WORKERS OF AMERICA and United Mine Workers of America, District 28, Petitioner,
v.
BENEDICT COAL CORPORATION.

Nos. 18 and 19.
Argued Oct. 21, 1959.
Decided Feb. 23, 1960.

[361 U.S. 460] Mr. Russell R. Kramer, Knoxville, Tenn., for petitioners Lewis and others.

Mr. M. E. Boiarsky, Charleston, W. Va., for petitioners United Mine Workers.

Mr. Robert T. Winston, Jr., Norton, Va., for respondent.

Mr. Justice BRENNAN delivered the opinion of the Court.

The National Bituminous Coal Wage Agreement of 1950, a collective bargaining agreement between coal operators and the United Mine Workers of America, provides for a union welfare fund meeting the requirements of § 302(c)(5) of the Taft-Hartley Act.^[1] The [461] fund is the "United Mine Workers of America Welfare and Retirement Fund of 1950." Each signatory coal operator agreed to pay into the fund a royalty of 30¢, later increased to 40¢, for each ton of coal produced for use or for sale.

Benedict Coal Corporation, the respondent in both No. 18 and No. 19, is a signatory coal operator. From [462] March 5, 1950, through July 1953, Benedict produced coal upon which the amount of royalty was calculated to be $177,762.92. Benedict paid $101,258.68 of this amount but withheld $76,504.24. The petitioners in No, 18, who are the trustees of the fund, brought this action to recover that balance in the District Court for the eastern District of Tennessee.^[2] Benedict's main defense was that the performance of the duty to pay royalty to the trustees, regarding them as third-party beneficiaries of the collective bargaining agreement, was excused when the promisee contracting party, the union and its District 28—who are the petitioners in No. 19 and who will be referred to as the union violated the agreement by strikes and stoppages of work. Benedict also cross-claimed against the union for damages sustained from the strikes and stoppages. By its answer to the cross-claim, the union denied that its conduct violated the agreement.

The jury, using a verdict form provided by the trial judge, found that the trustees were entitled to recover the full amount of the unpaid royalty but that Benedict was entitled to a setoff of $81,017.68; the jury also gave a verdict to Benedict for that sum on its cross-claim against the union. In a single entry, two judgments were entered on this verdict. One was a judgment in favor of Benedict on its cross-claim on which immediate execution was ordered, but with direction that the sum collected from the union be paid into the registry of the court. The other was a judgment in favor of the trustees for the unpaid balance of the royalty. However, effect was given to Benedict's defense in the trustees' suit by refusing immediate execution, and interest, on the trustees' judgment and ordering instead that that judgment be [463] satisfied only out of the proceeds collected by Benedict on its judgment and paid into the registry of the court.^[3]

The union and the trustees prosecuted separate appeals to the Court of Appeals for the Sixth Circuit. The union alleged that the District Court erred in holding that the strikes and stoppages violated the collective bargaining agreement, contending that, properly construed, the agreement did not forbid the strikes and stoppages; in the alternative, the union urged that the damages awarded were excessive. The trustees alleged as error, primarily, the refusal of the trial court to allow them immediate and unconditional execution, and interest, on their judgment against Benedict.

The Court of Appeals affirmed the District Court except as to the amount of damages awarded to Benedict [464] on its cross-claim, which the court adjudged was excessive. The court held that, under the evidence, Benedict's damages would not equal the amount of the trustees' judgment of $76,504.26. The case was remanded for a redetermination of Benedict's damages, with instructions that "(t)he judgment in favor of the Trustees will then be amended by the district court to allow execution and interest on that part of the said judgment which is in excess of the set-off in favor of Benedict as so redetermined." 6 Cir., 259 F.2d 346, 355. This left unaffected so much of the District Court's order as predicated the trustees' recovery, to the extent of the amount of Benedict's judgment as finally determined, upon Benedict's recovery of that judgment. The trustees and the union filed separate petitions for certiorari. We granted the trustee's petition, No. 18, and also the union's petition, No. 19, except that we limited the latter grant to the question whether the strikes and stoppages complained of by Benedict violated the collective bargaining agreement. 359 U.S. 905, 79 S.Ct. 580, 581, 3 L.Ed.2d 570.

In No. 19, the Court is equally divided. The judgment of the Court of Appeals, so far as it sustains the holding of the District Court that the union violated the collective bargaining agreement, is therefore affirmed.

We turn to the question presented in No. 18, whether the lower courts were correct in holding in effect that Benedict might assert the union's breaches as a defense to the trustees' suit, for to the extent Benedict (the promisor) does not collect from the union (the promisee) the union's liability is set off against Benedict's liability to the third-party beneficiary. The answer to that question requires, we think, our consideration of the nature of the interests of the union, the company, and the trustees in the fund under the collective bargaining agreement.

The provisions of the collective bargaining agreement creating the fund include the express provision that "this [465] Fund is an irrevocable trust created pursuant to Section 302(c) of the Labor-Management Relations Act, 1947." Another provision specifies that the purposes of the fund shall be all purposes "provided for or permitted in Section 302(c)."^[4] In this way the agreement plainly declares what the statute requires, namely, that the fund shall be used "for the sole and exclusive benefit" of the employees, their families and dependents. Thus, the fund is in no way an asset or property of the union.

Benedict does not, however, base its claim of setoff on any contention that the royalty was owing to the union and might because of this be applied to the payment of its damages. Benedict's position is that in an amount equal to the amount of the damages sustained from the union's breaches, no fund property came into existence under the terms of the collective bargaining agreement. This depends upon whether the agreement is to be construed as making performance by the union of its promises a condition precedent to Benedict's promise to pay royalty to the trustees. Benedict argues that the contracting parties expressed this meaning in an article at the close of the agreement—"This Agreement is an integrated instrument and its respective provisions are interdependent"—and in the provision in another article that the no-strike clauses are "part of the consideration of this contract." However, the specific provisions of the article creating the fund provide: (1) "During the life of this (collective bargaining) Agreement, there shall be paid into such Fund by each operator signatory * * * (a royalty) on each ton of coal produced for use or for sale." (2) The operator is required to make payment "on the 10th day of each * * * calendar month covering the production of all coal for use or sale during the preceding month." (3) "This obligation of each Operator signatory [466] hereto, which is several and not joint, to so pay such sums shall be a direct and continuing obligation of said Operator during the life of this Agreement * * *." (4) "Title to all the moneys paid into and or due and owing said Fund shall be vested in and remain exclusively in the Trustees of the Fund * * *."^[5] (Emphasis added.) These provisions, rather than the stipulations of general application, are controlling. Their clear import is that the parties meant that the duty to pay royalty should arise on the production of coal independent of the union's performance. Indeed, Benedict's conduct was not consistent with the interpretation which it is now urging. Benedict continued despite the breaches to perform all of its several promises under the contract, including the promise to pay royalty, paying over $100,000 on coal produced during the period in dispute and withholding only the portion in suit.

But our conclusion that the union's performance of its promises is not a condition precedent to Benedict's duty to pay royalty does not fully answer the question we are to decide. For it may reasonably be argued that the damages sustained by Benedict may nevertheless affect the amount of the trustees' recovery. Professor Corbin, while acknowledging that "No case of the sort has been discovered,"^[6] states: "It may perhaps be regarded as just to make the right of the beneficiary not only subject to the conditions precedent but also subject (as in the case of an assignee) to counter-claims against the promisee—at least if they arise out of a breach by the promisee of [467] his duties created by the very same contract on which the beneficiary sues."^[7] Using terms like "counterclaim" or "setoff" in a third-party beneficiary context may be confusing. In a two-party contract situation, when a promisor's duty to perform is absolute, the promisee's breaches will not excuse performance of that duty; the promisor has an independent claim against the promisee in damages. Formerly the promisor was required to bring a separate action to recover his damages. Under modern practice, when the promises are to pay money, or are reducible to a money amount, the promisor, when sued by the promisee, offsets the damages which he has sustained against the amount he owes, and usually obtains a judgment for any excess.^[8]

However, a third-party beneficiary has made no promises and therefore has breached no duty to the promisor. Accordingly, to hold, as the lower courts in this case did, that a promisor may "set off" the damages caused by the promisee's breach is actually to read the contract, which is the measure of the third party's rights, as so providing. In other words, although the promisor's duty to perform has become fixed by the occurrence of applicable conditions precedent, the parties may be taken to have agreed that the extent of the promisor's duty to the third party will be affected by the promisee's breach of contract. When it is said that "it may be just" to make the third party subject to the counterclaim, what must be meant is that a court should infer an intention of the promisor and promisee that the third party's rights be so limited.

This may be a desirable rule of construction to apply to third-party beneficiary contract where the promisor's interest in or connection with the third party, in [468] contrast with the promisee's, begins with the promise and ends with its performance. Of course, in entering into such a contract, the promisor may be held to have given up some defense against the third party's claim to performance of the promise, for example, the right to defeat that claim by rescinding the contract at any time he and the promisee agree. Nevertheless it may be fair to assume that had the parties anticipated the possibility of a breach by the promisee they would have provided that the promisor might protect himself by such means as would be available against the promisee under a two-party contract.^[9] This suggestion has not been crystallized into a rule of construction. Our problem is whether we should infer such an intention in this contract because there may be reasons making it appropriate to do so in the generality of third-party beneficiary contracts.

This collective bargaining agreement, however, is not a typical third-party beneficiary contract. The promisor's interest in the third party here goes far beyond the mere performance of its promise to that third party, i.e., beyond the payment of royalty. It is a commonplace of modern industrial relations for employers to provide security for employees and their families to enable them to meet problems arising from unemployment, illness, old age or death. While employers in may other industries assume this burden directly, this welfare fund was jointly created by the coal industry and the union for that purpose. Not only has Benedict entered into a longterm relationship with the union in this regard, but in compliance with § 302(c)(5)(B) it has assumed equal responsibility with the union for the management of the fund. In a very real sense Benedict's interest in the soundness of the fund and its management is in no way [469] less than that of the promisee union. This of itself cautions against reliance upon language which does not explicitly provide that the parties contracted to protect Benedict by allowing the company to set off its damages against its royalty obligation.

Moreover, unlike the usual third-party beneficiary contract, this is an industry-wide agreement involving many promisors. If Benedict and other coal operators having damage claims against the union for its breaches may curtail royalty payments, the burden will fall in the first instance upon the employees and their families across the country. Ultimately this might result in pressures upon the other coal operators to increase their royalty payments to maintain the planned schedule of benefits. The application of the suggested rule of construction to this contract would require us to assume that the other coal operators who are parties to the agreement were willing to risk the threat of diminution of the fund in order to protect those of their number who might have become involved in local labor difficulties.

Furthermore, Benedict promised in the collective bargaining agreement to pay a specified scale of wages to the employees. It would not be contended that Benedict might recoup its damages by decreasing these wages. This could be rationalized by saying that the covenant to pay wages is included in separate contracts of hire entered into with each employee. The royalty payments are really another form of compensation to the employees,^[10] and as such the obligation to pay royalty might be thought to be incorporated into the individual employment contracts. This is not to say that the same treatment should necessarily be accorded to royalty payments as is accorded to wages, but the similarity militates against the inference [470] that the parties intended that the trustees' claim be subject to offset.

Finally a consideration which is not present in the case of other third-party beneficiary contracts is the impact of the national labor policy. Section 301(b) of the Taft-Hartley Act, 29 U.S.C.A. § 185(b), provides that "(a)ny money judgment against a labor organization in a district court of the United States shall be enforceable only against the organization as an entity and against its assets, and shall not be enforceable against any individual member or his assets." At the least, this evidences a congressional intention that the union as an entity, like a corporation, should in the absence of agreement be the sole source of recovery for injury inflicted by it.^[11] Although this policy was prompted by a solicitude for the union members, because they might have little opportunity to prevent the union from committing actionable wrongs,^[12] it seems to us to apply with even greater force to protecting the interests of beneficiaries of the welfare fund, many of whom may be retired, or may be dependents, and therefore without any direct voice in the conduct of union affairs. Thus the national labor policy becomes an important consideration in determining whether the same inferences which might be drawn as to other third-party agreements should be drawn here.

Section 301 authorizes federal courts to fashion a body of federal law for the enforcement of collective bargaining agreements. Textile Workers Union of America v. Lincoln Mills, 353 U.S. 448, 77 S.Ct. 912, 1 L.Ed.2d 972. In the discharge of this function, having appropriate regard for the several considerations we have discussed, including the national labor policy, we hold that the parties to a collective bar [471] gaining agreement must express their meaning in unequivocal words before they can be said to have agreed that the union's breaches of its promises should give rise to a defense against the duty assumed by an employer to contribute to a welfare fund meeting the requirements of § 302(c)(5). We are unable to find such words in the general provisions already mentioned—"This Agreement is an integrated instrument and its respective provisions are interdependent," and "The contracting parties agree that (the no-strike clauses are) * * * part of the consideration of this contract"—or elsewhere in the agreement. The judgment of the Court of Appeals is therefore modified to provide that the District Court shall amend the judgment in favor of the trustees to allow immediate and unconditional execution, and interest, on the full amount of the trustees' judgment for $76,504.26 against Benedict.

It is so ordered.

Judgment of the Court of Appeals modified.

Mr. Justice STEWART took no part in the consideration or decision of this case.

Mr. Justice FRANKFURTER, dissenting.

This litigation arose out of an agreement entered into on March 5, 1950, between coal operators, including respondent, and United Mine Workers. It was the outcome of collective bargaining between the parties to fix the terms of industrial relations, wages and other conditions of employment, between the coal operators and their employees as represented by the union. It is an elaborate document of twenty pages, formulating the rights and obligations of the union on the one side and the rights and obligations of the operators on the other. Part of the agreement called for the establishment of a welfare and retirement fund for the benefit of employees and their families. This obligated the respondent, as one [472] of the operators bound by the agreement, to pay the Fund a fixed amount per ton of coal that it produced during the period in controversy. The narrow question before the Court is whether the respondent operator may withhold from the amount it is obligated, as a matter of arithmetic, to pay into the Fund, the amount of assessable damage owing it from the union in discharge of the union's liability for violation of its obligation under the agreement.

The suit was by the Trustees of the Fund, who claimed the payment in full of the scheduled amounts to be paid into the Fund. This liability is conceded, subject however to deduction for the amount owing from the union to Benedict on the basis of judicially determined liability. The Court of Appeals sustained the right of respondent to set off against its obligation to pay the defined amount into the Fund the amount arising out of liability by the union for breach of the union's obligation under the same agreement.

A considered reading of the Court's opinion compels the conclusion that if the agreement, which it is the Court's duty to construe, were "a typical third-party beneficiary contract," the respondent would not have to pay over the full amount payable to the Fund but could withhold the amount which is owing it for breach of the union's undertaking. The Court holds that this is not such a contract, although the agreement was not merely a single document with obviously interrelated sections, but specifically provided, "This agreement is an integrated instrument and its respective provisions are interdependent and shall be effective from and after March 5, 1950." The Court justifies rejecting what is assumed to be applicable to "a typical third-party beneficiary contract," partly by devising a policy distilled from two provisions of the Taft-Hartley Act, §§ 301(b) and 302(c)(5), and partly by its assumptions about the community of interest [473] between the employer and the trust fund in the assertedly special context of labor relations.

I have no doubt that legislation may be a source for reasoning in court-made law. But when legislation is thus drawn upon there should be a close relation between the terms of an enactment and what the courts deduce therefrom as a direction for adjudication. I find none such here. The two provisions drawn upon do not afford the radiations attributed to them. The relevant language of § 301(b) of the Taft-Hartly Act provides that "Any money judgment against a labor organization * * * shall be enforceable only against the organization as an entity and against its assets, and shall not be enforceable against any individual member or his assets." The text deals expressly only with the enforcement of a money judgment rendered against a labor organization. No such judgment is involved in this case. The undoubted concern of Congress behind this provision was to avoid the liability of union members solely by virtue of their union membership, a liability notoriously imposed by the laws of several of the States in 1947 and vividly remembered by labor unions by reason of the Danbury Hatters' case in federal courts. See Loewe v. Lawlor, 1908, 208 U.S. 274, 28 S.Ct. 301, 52 L.Ed. 488; Lawlor v. Loewe, 1915, 235 U.S. 522, 35 S.Ct. 170, 59 L.Ed. 341; Loewe v. Savings Bank of Danbury, 2 Cir., 1916, 236 F. 444, L.R.A. 1917B, 938.^[1] The intent and scope of § 301(b) were accurately described in the Senate Report on what became the Taft-Hartley Act as affording members of a union "all the advantages of limited liability without incorporation of the union." S.Rep.No.105, 80th Cong., 1st Sess., at 16.

[474] Nor does any emanation from § 302(c)(5) of the Taft-Hartley Act negate what would otherwise dictate the right of setoff setoff, be it remembered, not a condition on Benedict's duty to pay into the Fund—of what is owing to Benedict for breach of the contract by the union under the same contract by which Benedict promised the union to pay into the Fund for its mined coal. The function of § 302(c)(5) is to define the conditions set by Congress for permitted industrial welfare funds. It was not an implied qualification of just principles relevant to the enforcement of contracts generally. Only the other day the Court stated the purpose of the Congress in enacting § 302(c)(5):

"Congress believed that if welfare funds were established which did not define with specificity the benefits payable thereunder, a substantial danger existed that such funds might be employed to perpetuate control of union officers, for political purposes, or even for personal gain. See 92 Cong.Rec. 4892—4894, 4899, 5181, 5345—5346; S.Rep. No.105, 80th Cong., 1st Sess., at 52; 93 Cong.Rec. 4678, 4746—4747. To remove these dangers, specific standards were established to assure that welfare funds would be established only for purposes which Congress considered proper and expended only for the purposes for which they were established." Arroyo v. United States, 359 U.S. 419, 426, 79 S.Ct. 864, 868, 3 L.Ed.2d 915.

Congress was concerned with abuses by union officers, e.g., United States v. Ryan, 350 U.S. 299, 76 S.Ct. 400, 100 L.Ed. 335. It gave not a thought to withdrawing the enforcement of an agreement such as the one before us from rules relevant to the fair administration of justice.

The Court quotes one of the twin leading authorities on the law of contracts: "It may perhaps, be regarded as [475] just to make the right of the beneficiary not only subject to the conditions precedent but also subject (as in the case of an assignee) to counter-claims against the promisee—at least if they arise out of a breach by the promisee of his duties created by the very same contract on which the beneficiary sues." 4 Corbin, Contracts, § 819. As I understand it, apart from the effects attributed to §§ 301(b) and 302(c)(5), the Court rejects this "just" view as simply not applicable to this kind of a collective bargaining agreement. But the rule stated by Professor Corbin is not a technical rule narrowly limited to particular kinds of contracts. It reflects the broader generalization that under a civilized system of law all just presuppositions of an agreement are to be deemed part of it, and that courts, whose duty it is to determine the legal consequences of agreements, should attribute to an agreement such just presuppositions.

Underlying the Court's view is the assumption that the law of contracts is a rigorously closed system applicable to a limited class of arrangements between parties acting at arm's length, and that collective bargaining agreements are a very special class of voluntary agreements to which the general law pertaining to the construction and enforcement of contracts is not relevant. As a matter of fact, the governing rules pertaining to contracts recognize the diversity of situations in relation to which contracts are made and duly allow for these variant factors in construing and enforcing contracts. And so, of course, in construing agreements for the reciprocal rights and obligations of employers and employees, account must be taken of the many implications relevant to construing a document that governs industrial relations. There is no reason for jettisoning principles of fairness and justice that are as relevant to the law's attitude in the enforce [476] ment of collective bargaining agreements as they are to contracts dealing with other affairs, even giving due regard to the circumstances of industrial life and to the libretto that this furnishes in construing collective bargaining agreements.

One of the most experienced students of labor law has warned against the dangers of such an approach:

"The ease with which one can show that collective bargaining agreements have characteristics which preclude the application of some of the familiar principles of contracts and agency creates the danger that those who are knowledgeable about collective bargaining will demand that we discard all the precepts of contract law and create a new law of collective bargaining agreements. I have already expressed the view that the courts would ignore the plea but surely it is unwise even if they would sustain it. Many legal rules have hardened into conceptual doctrines which lawyers invoke with little thought for the underlying reasons, but the doctrines themselves represent an accumulation of tested wisdom, they are bottomed upon notions of fairness and sound public policy, and it would be a foolish waste to climb the ladder all over again just because the suggested principles were developed in other contexts and some of them are demonstrably inapposite. * * *" Cox, The Legal Nature of Collective Bargaining Agreements, in Collective Bargaining and the Law (Univ. of Mich. Law School), pp. 121—122.

Judges will do well to heed this admonition. Their experience makes them much more sure-footed in applying principles pertinent to the enforcement of contracts than they are likely to be in discerning the needs of wise industrial relations.

I would affirm the judgment.

----------

[1] Section 302(c)(5) is as follows:

"The provisions of this section (making it unlawful for the employer to deliver and a representative of the employees to receive anything of value) shall not be applicable * * * with respect to money or other thing of value paid to a trust fund established by such representative

for the sole and exclusive benefit of the employees of such employer, and their families and dependents (or of such employees, families, and dependents jointly with the employees of other employers making similar payments, and their families and dependents): Provided, That (A) such payments are held in trust for the purpose of paying, either from principal or income or both, for the benefit of employees, their families and dependents, for medical or hospital care, pensions on retirement or death of employees, compensation for injuries or illness resulting from occupational activity or insurance to provide any of the foregoing, or unemployment benefits or life insurance, disability and sickness insurance, or accident insurance; (B) the detailed basis on which such payments are to be made is specified in a written agreement with the employer, and employees and employers are equally represented in the administration of such fund, together with such neutral persons as the representatives of the employers and the representatives of the employees may agree upon and in the event the employer and employee groups deadlock on the administration of such fund and there are no neutral persons empowered to break such deadlock, such agreement provides that the two groups shall agree on an impartial umpire to decide such dispute, or in event of their failure to agree within a reasonable length of time, an impartial umpire to decide such dispute shall, on petition of either group, be appointed by the district court of the United States for the district where the trust fund has its principal office, and shall also contain provisions for an annual audit of the trust fund, a statement of the results of which shall be available for inspection by interested persons at the principal office of the trust fund and at such other places as may be designated in such written agreement; and (C) such payments as are intended to be used for the purpose of providing pensions or annuities for employees are made to a separate trust which provides that the funds held therein cannot be used for any purpose other than paying such pensions or annuities." Act of June 23, 1947, § 302, 61 Stat. 157, 29 U.S.C. § 186(c)(5), 29 U.S.C.A. § 186(c) (5).

[2] The article creating the fund provides that "Title to all the moneys paid into and or due and owing said Fund shall be vested in and remain exclusively in the Trustees of the Fund * * *."

[3] The District Court's entry reads in pertinent part as follows:

"Thereupon this action came on to be heard on a former day before the Court and a verdict was rendered by the jury in favor of Benedict Coal Corporation in the sum of $81,017.68 and in favor of John L. Lewis, Charles A. Owen and Josephine Roche (trustees of the fund) in the sum of $76,504.26, the verdict containing an offset provision.

"In accordance with the Court's interpretation of the offset provision in the jury's verdict and as a means of carrying out the intended effect of the verdict, it is ordered that the Benedict Coal Corporation have and recover the sum of $81,017.68 from United Mine Workers of America and United Mine Workers of America District 29, for which execution may issue.

"It is further ordered that said sum of $81,017.68 be paid into the registry of the Court to be disbursed by the clerk in accordance with instructions appearing below.

"It is further ordered that said Trustees, in accordance with the verdict rendered in their favor, have and recover of Benedict Coal Corporation the sum of $76,504.26, said recovery to be had in the manner following: From the aforesaid $81,017.68 ordered paid into the registry of the Court, that the sum of $76,504.26 be paid to said Trustees. That the difference between $76,504.26 and $81,017.68 be paid to Benedict Coal Corporation."

[4] See note 1, supra.

[5] In an earlier agreement the last clause read "moneys paid into said Fund" and was amended to read "moneys paid into and or due and owing said Fund" (emphasis added) after the decision in Lewis v. Jackson & Squire, Inc., D.C., 86 F.Supp. 354, appeal dismissed, 8 Cir., 181 F.2d 1011, holding, among other things, that under the agreement, no trust arose as to royalty not paid into the fund.

[6] But cf. Fulmer v. Goldfarb, 171 Tenn. 218, 101 S.W.2d 1108; Depuy v. Loomis, 74 Pa.Super. 497.

[7] 4 Corbin, Contracts, § 819.

[8] See 3 Corbin, Contracts, § 709. Cf. 3 Williston, Contracts, § 883 (Rev. ed. 1936). Compare Thornton v. Wynn, 12 Wheat. 183, 6 L.Ed. 595, Withers v. Greene, 9 How. 213, 13 L.Ed. 109.

[9] To some degree the third-party beneficiary may be thought of as being "substituted" for the promisee. See Dunning v. Leavitt, 85 N.Y. 30, 35.

[10] See 93 Cong.Rec. 4746—4747. See also S.Rep. No. 105, 80th Cong., 1st Sess. 52 (supplemental views).

[11] See 93 Cong.Rec. 5014; id., at 3839. Cf. Hearings before House Committee on Education and Labor on H.R. 8, H.R. 725, H.R. 880, H.R. 1095, and H.R. 1096, 80th Cong., 1st Sess. 135—136.

[12] See 93 Cong.Rec. 6283.

----------

[1] The result of this litigation was a judgment for $250,000 against the goods and estate of over 150 named defendants and attachment was issued against them.