Plaintiffs brought this class action on behalf of themselves and other disadvantaged unemployed persons, alleging that defendants failed to perform contracts with the United States government under which defendants agreed to provide job training and at least one year of employment to certain numbers of such persons. Plaintiffs claim that they and the other such persons are third party beneficiaries of the contracts and as such are entitled to damages for defendants' nonperformance. General demurrers to the complaint were sustained without leave to amend, apparently on the ground that plaintiffs lacked standing to sue as third party beneficiaries. Dismissals were entered as to the demurring defendants, and plaintiffs appeal.
We affirm the judgments of dismissal.
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alleges that under 1967 amendments to the Economic Opportunity Act of 1964 (81 Stat. 688-690, 42 U.S.C. §§ 2763-2768, repealed by 86 Stat. 703 (1972)) "the United States Congress instituted Special Impact Programs with the intent to benefit the residents of certain neighborhoods having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.
The complaint contains 11 causes of action. The second, fourth, and sixth causes of action seek damages of $3,607,500 against Socoma, $3,052,500 against Lady Fair, and $2,220,000 against Monarch, calculated on the basis of 12 months' wages at minimum rates and $1,000 for loss of training for each of the jobs the defendant contracted to provide. The third and fifth causes of action seek similar damages for the 139 persons whose jobs were terminated by Socoma and the 90 persons whose jobs were terminated by Lady Fair. The first, seventh, and eighth causes of action seek to impose joint liability on Socoma, Lady Fair, and Monarch as joint venturers, alleging that they negotiated the contracts through a common representative and entered into a joint lease of the Lincoln Heights jail building. The ninth, tenth, and eleventh causes of action seek to impose the liability of the corporate defendants upon their officers and directors named as individual defendants, alleging that the latter undercapitalized their respective corporations and used the same as their alter egos.
Each cause of action alleges that the "express purpose of the [Government] in entering into [each] contract was to benefit [the] certified disadvantaged hard-core unemployed residents of East Los Angeles [for whom defendants promised to provide training and jobs] and none other, and those residents are thus the express third party beneficiaries of [each] contract."
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.
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
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]."
Moreover, contrary to plaintiffs' contention, section 145 of the Restatement of Contracts does preclude their recovery because the services which the contracts required the defendants to perform were to be rendered to "members of the public" within the meaning of that section. Each contract recites it is made under the "Special Impact Programs" part of the Economic Opportunity Act of 1964 and pursuant to a presidential directive
In providing for special impact programs, Congress declared that such programs were directed to the solution of critical problems existing in particular neighborhoods having especially large concentrations of low-income persons, and that the programs were intended to be of sufficient size and scope to have an appreciable impact in such neighborhoods in arresting
The fact that plaintiffs were in a position to benefit more directly than certain other members of the public from performance of the contract does not alter their status as incidental beneficiaries. (See Rest., Contracts, § 145, illus. 1: C, a member of the public cannot recover for injury from B's failure to perform a contract with the United States to carry mail over a certain route.)
For the reasons above stated we hold that plaintiffs and the class they represent have no standing as third party beneficiaries to recover the damages sought in the complaint under either California law or the general contract principles which federal law applies to government contracts.
The judgments of dismissal are affirmed.
McComb, J., Sullivan, J., and Clark, J., concurred.
I dissent. The certified hard-core unemployed of East Los Angeles were the express, not incidental, beneficiaries of the contracts in question and, therefore, have standing to enforce those contracts.
Civil Code section 1559 provides that "A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties 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], 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 third parties,' 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." (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, was to benefit only the general public and particularly the local neighborhoods where these programs were to be implemented. Although members
The majority err in the above conclusion because the congressional purpose was to benefit both the communities in which the impact programs are established and the individual impoverished persons in such communities.
The intent of the contracts themselves is expressed in their preambles: "WHEREAS, the Secretary of Labor is authorized ... to enter into contracts to provide for Special Impact Programs ... directed to the solution of the critical problems existing in particular communities and neighborhoods within urban areas of the Nation having especially large concentrations of low-income persons; and [¶] 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
In accord with this expressed intent, the substantive provisions of the contracts confer a direct benefit upon the class seeking to enforce them. The contracts call for the hiring of stated numbers of hard-core unemployed from the East Los Angeles Special Impact Area for a period of at least one year at a starting minimum wage of $2.00 per hour for the first 90 days and a minimum wage of $2.25 per hour thereafter, or for the prevailing wage for the area, whichever is higher. In addition to requiring appropriate job training for such employees, the contracts also require "That the Contractor will arrange for the orderly promotion of persons so employed into available supervisory-managerial and other positions, and will arrange for all contract employees to obtain a total ownership interest not exceeding thirty (30) percent in the Contractor through an appropriate stock purchase plan...." The scope of the stock purchase plans is detailed in each of the contracts.
In Lucas v. Hamm, 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 bring an action for the same breach does not
The majority, relying on Restatement of Contracts section 145, and City & County of San Francisco v. Western Air Lines, Inc., 204 Cal.App.2d 105, [22 Cal.Rptr. 216], contend 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...." (Ante, p. 401.) 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." (Ante, p. 406.) The majority conclude (ante, p. 404) 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 & County of San Francisco v. Western Air Lines, Inc., supra, 204 Cal.App.2d 105, 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.)
The express language of this provision indicates that it applies only to a promise to do an act or render a service to "some or all of the members of the public." The section deals solely with the promisor's duty to give compensation to "such" members of the public. The type of government contract to which section 145 applies is therefore distinguishable from the contracts in the instant case. Here, the contracts specify a particular class
In addition, as indicated by comment a to section 145 of the Restatement, that section is merely a special application of the principles stated in Restatement section 133 which provides in part that "(1) Where performance of a promise in a contract will benefit a person other than the promisee, that person is, ... (a) a donee beneficiary if it appears from the terms of the promise in view of the accompanying circumstances that the purpose of the promisee in obtaining the promise of all or part of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisor to some performance neither due nor supposed or asserted to be due from the promisee to the beneficiary...."
The language of section 133, standing alone, could reasonably suggest that members of the general public are "donee beneficiaries" under any contract whose purpose is to confer a "gift" upon them. Section 145 qualifies this broad language and treats the general public merely as incidental, not direct, beneficiaries under contracts made for the general public benefit, unless the contract manifests a clear intent to compensate such members of the public in the event of a breach. Section 145 does not, however, entirely preclude application of the "donee beneficiary" concept to every government contract. Whenever, as in the instant case, such a contract expresses an intent to benefit directly a particular person or ascertainable
In City & County of San Francisco v. Western Air Lines, Inc., supra, 204 Cal.App.2d 105, defendant airline was held to be merely an incidental beneficiary of contracts providing that an airport "`will operate ... for the use and benefit of the public, on fair and reasonable terms and without unjust discrimination.'" (P. 118, Italics added.) Nothing in the various contracts and assurances involved in the case "shows any intent of the contracting parties to confer any benefit directly and expressly upon air carriers such as the defendant." (P. 120.) The court stated that "To recover as a third-party beneficiary, one must show that the contract in question was made expressly for his benefit. [Citations.]" (P. 120.)
The rationale for the Western Air Lines rule is set out in Ukiah v. Ukiah Water and Imp. Co., 142 Cal. 173, 180 [75 P. 773] [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
Since in Western Air Lines the government contract at issue was not made expressly for the benefit of defendant but instead to benefit the general public, that case was correctly decided under Restatement of Contracts section 145. However, an interpretation to which the contracts in the instant case "are reasonably susceptible and which is pleaded in the complaint or could be pleaded by proper amendment" (ante, p. 400), in light of the legislative intent and the language of the contracts themselves, is that they were made expressly for the benefit of a particular class of persons, namely the class consisting of the certified hard-core unemployed of East Los Angeles.
Western Air Lines holds that a member of the general public cannot recover under a contract made for 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.) 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, so long as the contract expressly declares an intent to benefit a 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 damage clauses in each of the contracts limits defendants' financial risks and was intended to preclude the assertion of third party claims. (Ante, p. 402.) Yet, these clauses simply provide for various refunds of monies advanced by the government in the event of a default. These so-called "liquidated damages" clauses nowhere purport to limit damages to the specified refunds. Nothing in the contracts limits the right of the government or, more importantly, plaintiffs' class, to seek additional relief. As I noted above, the fact that the government could also sue for breach of the contracts does not affect the rights of third party beneficiaries. (Shell v. Schmidt, supra, 126 Cal.App.2d 279, 290.)
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, 44 A.L.R.3d 615].) 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, J., and Mosk, J., concurred.
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.
"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: ..."
"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."
Comment c to the tentative draft of section 145 states further that "Government contractors sometimes make explicit promises to pay damages to third persons, and such promises are enforced. If there is no explicit promise, and no government liability, the question whether a particular claimant is an intended beneficiary is one of interpretation, depending on all the circumstances of the contract." (Italics added.) Thus, under the tentative draft, section 145 is not an outright prohibition of the enforcement of governmental contracts by third parties absent the enumerated conditions. Comment c makes it clear that the question as to a particular claimant is one of interpretation, and that, where, as here, the contract manifests an intent to benefit a particular third party, liability is properly imposed upon the promisee in favor of such third party.