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Court of Appeal, Second District, Division 3, California.

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

Civ. 38030.

Decided: January 25, 1972

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.

Class action for damages for breach of contract file by nine plaintiffs on behalf of themselves and other persons similarly situated, alleged to be third party beneficiaries of a contract between defendants and the Secretary of Labor, United States Government. General and special demurrers were filed by defendants Socoma Companies, Inc., Michael Modell, Yoko Nishiyama, David H. Chung, Monarch Electronics International, Inc., Meyer B. Price and Phillip Handler. The demurrers were sustained without leave to amend; orders of dismissal with prejudice were entered; plaintiffs appeal therefrom. The orders of dismissal are deemed final judgments and are appealable. (Code Civ.Proc., § 581d.)

Lady Fair Kitchens, Incorporated, and five additional individuals are also named as defendants; they apparently have not appeared and are not parties to this appeal.

Allegations of the Complaint

Congress appropriated funds to the United States Department of Labor to administer special impact programs authorized by the Economic Opportunity Act of 1964, as amended (42 U.S.C.A. §§ 2763–2768) for the benefit of residents of certain neighborhoods having large concentrations of low income persons and in which the residents suffer from chronic unemployment and rising tensions. On October 2, 1967, the President of the United States invited private industry to join with the Department of Labor in the special impact programs by providing training and work opportunities for the benefit of such persons.

The Department of Labor subsequently designated the East Los Angeles Neighborhood as a special impact area, and through the East Los Angeles Service Center, an agency of the California Department of Human Resources and Development, certified 2,017 residents of the area as ‘disadvantaged hardcore unemployed residents . . . who were fully qualified for employment’ under contracts to be entered into under the special impact programs between the Secretary of Labor and private industry. Plaintiffs were among the persons so certified.

On January 17, 1969, each corporate defendant entered into a contract with the Secretary of Labor under which each agreed to lease from the City of Los Angeles prior to May 1, 1969, separate portions of the then vacant Lincoln Heights jail, to renovate and equip its respective leasehold on or before July 1, 1969, for the manufacture and production of certain articles, to then hire and train a specified number of the certified disadvantaged persons, totaling 1,600 under the three contracts, for a period of at least 12 months, and to make capital expenditures, totaling $15,000,000 under the three contracts, in the performance thereof. Although the contracts were separate, covered different portions of the building, required the manufacture of different items, required the employment of different numbers of persons, and required different capital expenditures, it is alleged that the contracts were procured jointly and that the two corporate defendants were engaged in a joint venture. As consideration for the agreements, the Department of Labor paid to each corporate defendant a specified sum of money, totaling $1,349,500 under the three contracts.

Defendant corporations failed to employ and train the required number of certified disadvantaged persons. As a result on April 9, 1970, plaintiffs filed this action for themselves and for the class similarly situated, the 1600 certified disadvantaged persons, against the three corporations and their respective officers seeking to recover damages for the loss of wages and for the loss of job training that would have accrued to members of the class had defendants fully performed their obligations under the contracts.

Neither the United Stated Government nor the Secretary of Labor is a party to this litigation. Although each contract contains a provision for termination by the government and for liquidated damages to the government in the event of default by the defendants, the complaint does not indicate what, if any, action has been taken by the Secretary of Labor subsequent to the alleged defaults.

The Demurrers

The general demurrers set forth as grounds that the plaintiffs do not have ‘the legal capacity to sue,’ that the complaint contains ‘a defect or misjoinder of parties plaintiff,’ and that insufficient facts are alleged to state causes of action against each defendant. The special demurrers state that the allegations of the complaint are uncertain and ambiguous in certain respects.

After argument thereon the court made the following minute order: ‘Court finds that plaintiffs have no standing to sue. Demurrers are sustained without leave to amend on the grounds stated in the demurring papers.’

Issues Presented

Notwithstanding the wording of the minute order sustaining the demurrers, plaintiffs argue that the court below expressly stated that the allegations of the complaint were sufficient to meet the requirements of a class action (see Code Civ.Proc., § 382; Daar v. Yellow Cab Co., 67 Cal.2d 695, 704, 63 Cal.Rptr. 724, 433 P.2d 732), and that the demurrers were sustained upon the sole ground that plaintiffs filed to allege a sufficient interest under the contracts to give them legally enforceable rights as third party beneficiaries thereof. By this argument plaintiffs seek to limit our review of their complaint to this latter issue only.

Relying on the minute order defendants argue that the demurrers were sustained upon all grounds set forth therein, and that the issues presented include not only that stated by plaintiffs, but also whether plaintiffs have alleged sufficient facts to meet the requirements of a class action.

It has long been held that in reviewing upon appeal an order sustaining a demurrer to a complaint, an appellate court is not limited to the ground mentioned by the court below; if the complaint is insufficient upon any ground specified in the demurrer, even though the lower court deemed it sufficient in that respect, the order must be sustained. (Burke v. Maguire, 154 Cal. 456, 461, 98 P. 21; Patton v. Board of Harbor Commissioners 13, Cal.App.3d 536, 544, fn. 7, 91 Cal.Rptr. 832, 3 Witkin, Cal.Proc. (1954) Appeal, § 76, p. 2234.) Our review of the sufficiency of the complaint is therefore not limited to the one ground urged by plaintiffs.

Third Party Beneficiary

Under section 1559 of the Civil Code 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. Pertinent 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: ‘[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 on 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 member or members of the intended class may enforce it. [Citation.] The fact that the government is one of the contracting parties does not change the rule. Agreements between a state or municipality with individuals have frequently been held to be third parry beneficiary contracts for the benefit of some member or groups of members of the public. [Citation.]’

In Southern Cal. Gas Co. v. ABC Construction Co., 204 Cal.App.2d 747, 752, 22 Cal.Rptr. 540, the court pointed out that section 1559 makes no reference to the different types of beneficiaries and that the California cases generally rely on the classifications set forth in section 133 of the Restatement of Contracts, as follows:

A person is a donee beneficiary: ‘(a) . . . 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.’

A person is a creditor beneficiary: ‘(b) . . . if no purpose to make a gift appears from the terms of the promise in view of the accompanying circumstances and performance of the promise will satisfy an actual or supposed or asserted duty of the promisee to the beneficiary, or a right of the beneficiary against the promisee which has been barred by the statute of limitations or by a discharge in bankruptcy, or which is unenforceable because of the Statute of Frauds.’

A person is an incidental beneficiary: ‘(c) . . . if neither the facts stated in Clause (a) nor those stated in Clause (b) exist.’

Plaintiffs rely on Shell v. Schmidt, supra, 126 Cal.App.2d 279, 272 P.2d 82, a donee beneficiary case. In Shell defendant building contractors, immediately following World War II, was issued priority permits for building supplies in conjunction with his agreement to construct houses for veterans in conformity with plans and specifications approved by the Federal Housing Authority. Defendant built a group of houses without complying with the approved plans and specifications. In holding that the veteran-purchasers could maintain an action against the contractor for breach of his contract with the FHA, the court said at page 290, 272 P.2d at page 89: ‘Once it is established that the relationship between the contractor and the government is contractual, it follows that veterans purchasing homes, that is, the class intended to be protected by that contract, are third party beneficiaries of that contract. As already pointed out, the statute and the regulations passed thereunder resulting in the contract were passed to aid and assist veterans and for their benefit. Purchasing veterans constitute the class intended to be benefited, and the contract must therefore be for their benefit.’

Shell is readily distinguishable from the instant case. In Shell the third party beneficiaries acted in reliance on the contract; here, we have no allegation that plaintiffs or the members of the class did so. As pointed out on page 37 of the 1971 pocket part to 4 Corbin, Contracts (1951), section 782, in Shell: ‘[t]he veterans seem to be donee beneficiaries; but in paying for the houses they acted in reliance on the government contract. This was substantial action by the third party beneficiary, actually foreseen and intended by the contractor (promisor). Such action was a necessary condition of any enforceable right in the beneficiary. The case is within the purposes of Restatement, Contracts, § 90.’ (Italics added.) Section 90 of the Restatement of Contracts provides: ‘A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.’

Defendants rely on Southern Cal. Gas Co. v. ABC Construction Co., supra, 204 Cal.App.2d 747, 22 Cal.Rptr. 540, City & County of San Francisco v. Western Air Lines, Inc., 204 Cal.App.2d 105, 22 Cal.Rptr. 216, and cases cited therein, in which the alleged third party beneficiary was held to be an incidental beneficiary and was denied the right of recovery against the promisor for breach of contract.

In the Southern Cal. Gas Co. case, it was alleged that defendant entered into a contract with a flood control district for the installation of a storm drain, agreeing to undertake its responsibilities without damage to existing pipelines; that during the course of construction defendant breached its contract and as a result an explosion was caused which damaged plaintiff's pipeline. The court said (204 Cal.App.2d at p. 752, 22 Cal.Rptr. at p. 544): ‘In the instant case it does not appear that plaintiff was either a creditor or donee beneficiary. The contract was not made expressly for the benefit of plaintiff in that the quoted provisions were for the protection of the Flood Control District and were not intended to give contractual rights to third persons such as plaintiff. Plaintiff is only on incidental beneficiary of the contract and as such cannot sue thereon to recover damages for breach of contract.’

In the Western Air Lines case, 204 Cal.App.2d 105, 22 Cal.Rptr. 216, the city received a grant of federal funds for improvements at its airport upon the agreed condition that the airport would be available for public use ‘without unjust discrimination.’ Western Air Lines paid under protest certain charges for the use of facilities at the airport, contending that the city had discriminated against it as compared with charges for similar facilities furnished other air lines. The city filed a declaratory relief action to determine its rights in the monies paid under protest; Western Air Lines filed a counterclaim for recovery of these monies. In reaching the conclusion that Western Air Lines was at most an incidental beneficiary and had no enforceable third party beneficiary claim for breach of the agreement, the court pointed out that the contracts did not indicate that the reference therein to unjust discrimination was made for the benefit of the aircraft operators, and said on pages 120–121, 22 Cal.Rptr. on page 225: ‘[A]s stated in Shutes v. Cheney, . . . [123 Cal.App.2d 256, 266 P.2d 902] ‘an intent to make the obligation inure to the benefit of the third party must have been clearly manifested by the contracting parties. [Citation.] Where a contract incidentally benefits a third person but is not expressly made for his benefit, he cannot recover thereon. [Citations.]’ (P. 262, 266 P.2d P. 907.) Moreover, ‘[a] promisor bound to the United States . . . 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.) [Citations.]'

Section 145 of the Restatement of Contracts, relied on in Western Air Lines, supra, sets forth special principles applicable to government contracts involving third party beneficiaries. It was not cited by the court in either the Shell or Southern Cal. Gas Co. cases and has not been cited in any other California case involving a contract with a government agency. It is quoted without comment in 4 Corbin, Contracts (1951) section 805, page 201, and in 2 Williston, Contracts 3d (1959) section 373, page 941. A proposed revision thereof is contained in Tentative Draft No. 3, Restatement of Contracts 2d (1967) at page 76; it provides in part: ‘(2) . . . [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 this proposed revision provides in part: ‘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 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) are met.’

Comment c to the proposed revision states in part: ‘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 interpretation, depending on all the circumstances of the contract.’ (Italics added.)

The reporter's note to this proposed revision states in part: ‘Subsection (2) is the former section replaced in more general terms.’ (P.79.)

Applying the revised draft to the facts of the instant case, it is readily apparent that the conditions quoted have not been met. Subsection (2)(a) has not been satisfied because the terms of the contract do not provide for liability by the promisors (defendants) to the beneficiaries (plaintiffs). Subsection (2)(b) is in the conjunctive and requires both (1) that the promisee (government) be subject to liability to the beneficiaries (plaintiffs) for damages, and (2) that direct action against the promisors (defendants) is consistent with the terms of the contract; here the first condition is not present as there is no provision for governmental liability; as will hereinafter be indicated, the second of the conjunctive conditions also has not been met. But in view of the quoted reporter's note and comment c, we prefer not to rest our decision on the failure to meet the conditions set forth in subsection (2)(b) of the tentative draft on the provisions of section 145, as approved in Western Air Lines, supra, and as restated in comment c of the tentative draft, supra. Based thereon we reach the conclusion that ‘an intention is [not] manifested in the contract[s], as interpreted in the light of the circumstances surrounding [their] formation, that the promisors[s] shall compensate members of the public for such injurious consequences . . . ’ (Rest., Contracts, § 145, quoted in Western Air Lines, supra, 204 Cal.App.2d at pp. 120–121, 22 Cal.Rptr. 216), and that as a result plaintiffs and the class they represent cannot sue on the contracts to recover damages for the breach thereof. We look to the contracts to ascertain the intent of the contracting parties.

Although it appears that plaintiffs and the members of the class they represent are donee beneficiaries of the contracts, the contracts, which incorporate therein by reference the statutory authority therefor, expressly set forth only two types of rights and benefits available to the class, i. e., to receive training and employment opportunities. Nothing is said therein about a right to recover monetary damages in lieu of training and employment. There is no legal reason why the contracting parties cannot limit or deny rights and remedies of third party beneficiaries; if the contracting parties so provide, the courts will effectuate their intent by restricting or denying the third party beneficiaries in their remedy. (4 Corbin, Contracts (1951) § 777, p. 25.)

The Economic Opportunity Act of 1964 was enacted for the express purpose of removing hard-core unemployed from welfare rolls and to give such persons ‘the opportunity for education and training, the opportunity to work, and the opportunity to live in decency and dignity.’ (42 U.S.C.A. § 2701.) The special impact programs are only one of several programs authorized by this law; the stated purpose for the special impact programs is ‘to establish special programs which (1) are directed to the solution of the critical problems existing in particular communities or neighborhoods . . . within those urban areas having especially large concentrations of low-income persons, and within those rural areas having substantial out-migration to eligible urban areas, and (2) are of sufficient size and scope to have an appreciable impact in such communities and neighborhoods in arresting tendencies toward dependency, chronic unemployment and rising community tensions.’ (42 U.S.C.A. § 2763.) To read into the contracts entered under this legislation the right to monetary benefits in lieu of performance would give to the plaintiffs and the class they represent benefits never contemplated or intended; such benefits, if awarded, would completely disregard the expressed purpose of the program and could be detrimental to the participants and society as a whole.

The intent of the parties as to the rights of the beneficiaries is also evidenced by the provisions of the contracts with respect to damages. They provide that in the event of total default by defendants, they shall refund to the government all monies advanced, plus interest, and that in the event of partial default they shall refund to the government liquidated damages under prescribed schedules, including a specified sum for each employment opportunity short of the total agreed to be furnished by each defendant. There is no provision in the contracts for damages to third party beneficiaries. We recognize that ‘[i]t is no objection to an action by the third party that the contracting party . . . could also sue upon the contract for the same breach’ (Shell, supra, 126 Cal.App.2d at p. 290, 272 P.2d at p. 89), but the presence of a liquidated damage clause in favor of a contracting party and the absence of a provision for damages in favor of the third party beneficiaries is some evidence of intent to limit damages only to the contracting parties. In considering a similar clause in Western Air Lines, supra, the court said (204 Cal.App.2d at p. 120, 22 Cal.Rptr. at p. 225): ‘The granting agreement in each instance entitled the administrator to recover all grant payments made where there has been any misrepresentation or omission of a material fact by the sponsor. We find no other provision for recovery of funds by the administrator and none whatsoever permitting the 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 . . ..’'

In view of our conclusion that plaintiffs and the class they represent have no legally enforceable rights as third party beneficiaries against defendants, it is not necessary to discuss other points raised on this appeal, including the question as to whether this is a proper class action.

The judgment (orders of dismissal) are affirmed.

SCHWEITZER, Acting Presiding Justice.

COBEY and ALLPORT, JJ., concur.