Third-Party Beneficiaries of Government Contracts: Imagining an Equitable Approach and Applying It to Broken Promises in Detroit.

AuthorChess, Gabe

Courts have widely adopted a heightened standard for recognizing third-party beneficiaries of government contracts. But the justifications offered for the heightened standard do not withstand scrutiny. Instead, courts should apply a series of equitable factors to produce results consistent with the concern for "manifest justice" that animates third-party beneficiary doctrine. Governments make contracts frequently, often to address issues of huge importance to their citizens, including housing, economic development, and healthcare. In each of these areas, third-party beneficiary doctrine may be an important avenue of relief to citizens harmed by broken promises and may encourage the government and its contracting partners to more seriously include citizens in their decisionmaking. This Note proposes reforms to third-party beneficiary doctrine necessary for that to happen and applies those reforms to a pair of government contracts made in Detroit.

TABLE OF CONTENTS INTRODUCTION I. A SPECIAL RULE FOR THIRD-PARTY BENEFICIARY CLAIMS TO GOVERNMENT CONTRACTS A. Third-Party Beneficiaries of Government Contracts B. Restatement (Second) of Contracts Section 313 and the Problem of the Heightened Standard for Government Contracts 1. The Flawed Underpinnings of a Special Standard for Government Contracts 2. Section 313's Misguided Sensitivity to Sovereign 3. An Overly Formalistic View of Creditor Beneficiary and Donee Beneficiary Categories 4. The Government Is a Uniquely Unpredictable Contracting Partner II. TOWARD AN EQUITABLE APPROACH A. Who Benefits from Performance? B. Will the Injured Party Seeking Third-Party Beneficiary Status Be Left Without a Remedy If That Status Is Denied? C. What Remedy Is the Plaintiff Seeking? III. THE EQUITABLE APPROACH APPLIED IN DETROIT A. The Little Caesars Arena Deal 313 1. The Construction Contractors' Failure to Hire Enough Detroiters 2. The Concessionaire's Failure to Employ and Train Enough Detroiters B. Detroit Land Bank Authority Contracts CONCLUSION INTRODUCTION

In 1929, the Ford Motor Company commenced construction of a 12,000foot-long tunnel to carry more than 913,600,000 gallons of water a day from the Detroit River to its River Rouge plant. (1) It was nearly twice the amount of purified water used daily in the entire city of Detroit. (2) The city awarded Ford a contract to construct the tunnel, which the city would own and then lease back to the company for one dollar a year. (3) Ford promised to pay for any damage to private property resulting from construction. (4)

During construction, Ford badly damaged a privately owned building. (5) The owners of that building brought suit against Ford after the company refused to pay for repairs. (6) The trial court ruled for the plaintiffs, finding that they were third-party beneficiaries of Ford's promise. (7) The Michigan Supreme Court affirmed in Bator v. Ford Motor Co., reasoning that, despite the complexity of the case and lack of authorities squarely on point, "[t]o hold that these plaintiffs are without remedy" would be "shocking to one who believes that American liberties are founded on the principle of justice." (8)

The actors and tensions at work in this case resonate today in Detroit and in municipal landscapes across the United States. (9) Powerful corporations continue to contract with cities and, in doing so, receive considerable private benefit. (10) Yet, much like in Bator, issues can arise in the performance of government contracts. In such cases, third-party beneficiary doctrine may be necessary to avoid shocking results. But given the emergence throughout the twentieth century of a heightened standard applied when plaintiffs claim to be third-party beneficiaries of government contracts, it seems unlikely that Bator would come out today as it did then.

This Note argues that the heightened standard courts often cite for recognizing third-party beneficiaries of government contracts is inconsistent with the principles underlying third-party beneficiary doctrine. In place of that special rule, courts should apply a set of equitable considerations that are consistent with the doctrine's original rationale. These principles, rather than the current rule, will lead to results more consistent with the concern for substantive justice at the core of the doctrine. Widespread privatization amplifies the need for this reform. As illustrated by this Note's analysis of the doctrine at work in Detroit, privatization that is nominally intended to help citizens too often fails to deliver. A reformed approach could empower those citizens.

The analysis in this Note operates from a pair of baseline assumptions. First, the effects of privatization, defined here as the provision of public services through private interests, are felt most directly by communities of color and marginalized, poor, and less politically powerful people. (11) And second, both public and private law should serve the end of full and equal participation in democratic self-governance. A reformed third-party beneficiary doctrine can contribute to that end by recognizing legal rights that, in turn, empower citizen organizing around and participation in political decisionmaking in the face of increased privatization. (12)

In Part I, this Note reviews the history of third-party beneficiary doctrine in the context of government contracts and argues that the often-applied heightened standard of Restatement (Second) of Contracts section 313 is unjustified. Part II outlines three equitable considerations that courts should emphasize in place of the standard of section 313: who stands to benefit from performance of the contract, the availability of other remedies to the plaintiffs, and the form of damages sought. Part III tests those equitable principles against two government contracts made in Detroit. Those contracts are the kind of government contracts where third-party beneficiaries plausibly exist, yet section 313 is likely to bar their claims.


    Modern courts often apply a special rule to third-party beneficiary claims to government contracts. (13) This rule amounts to a heightened standard, requiring more of would-be third-party beneficiaries of government contracts than is required when parties claim to be beneficiaries of contracts not involving the government. (14) In Section I.A, this Note discusses the special rule's history and its rationales. Section I.B argues that those rationales do not justify the special treatment of third-party beneficiary claims to government contracts.

    1. Third-Party Beneficiaries of Government Contracts

      The third-party beneficiary doctrine abrogated a touchstone maxim of contract law--the requirement of privity. (15) Its development has been described as a "minor theoretical revolution." (16) Breaking from the privity requirement, the third-party beneficiary doctrine says that, in certain circumstances, a third party to the contract may enforce its terms. (17) Courts allowing these claims generally require that the contracting parties must enter the contract with the intent to benefit the third party. (18) Some courts also require that the benefit be either intended as a gift to the third party or meant to satisfy the promisee's preexisting duty to the third party. (19) In the former situation, the third party is dubbed a donee beneficiary, and in the latter, a creditor beneficiary. (20) This novel rule "developed teleologically" so as to do "justice ... between man and man." (21) It has, at its core, a concern for "someone outside of the act of contracting." (22)

      As third-party beneficiary doctrine spread across U.S. jurisdictions, (23) concerns particular to recognizing third-party beneficiaries of government contracts arose, (24) including: (1) that all government contracts may be characterized as being for the benefit of the public, (2) that the possible liability to third-party beneficiaries of those contracts may therefore be expansive, and (3) that resulting costs for any party contracting with the government may be prohibitive. (25)

      These underlying concerns were famously articulated by then-Chief Judge Cardozo's opinion in H.R. Moch Co. v. Rensselaer Water Co. (26) There, a fire destroyed the plaintiff's warehouse. (27) The city had contracted with a water company to provide water to fire hydrants at a specified pressure level. The plaintiff claimed that, had the company performed their contract obligations, the fire would have been extinguished and would not have reached his warehouse. (28) He brought a third-party beneficiary claim against the water company for breaching its contract with the city. (29)

      A unanimous court dismissed the claim. (30) Cardozo noted that "[n]o legal duty rests upon a city to supply its inhabitants with protection against fire." (31) He went on to acknowledge that a contract like that at issue in this case could create a third-party beneficiary, but only if an "intention appears [in the contract] 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." (32) Here, he said, that intention did not appear in the contract. (33)

      Cardozo observed that "[i]n a broad sense it is true that every city contract, not improvident or wasteful, is for the benefit of the public." (34) But, because of this reality, he demanded that the contracting parties must have intended to allow this particular member of the public to hold the water company liable for breach in court. (35) To hold otherwise would expand liability beyond reasonable limits and burden the water company with an "assumption of a risk ... overwhelming" the relatively modest compensation it received. (36) To illustrate the concern, Cardozo imagined a visitor to an unheated public building who caught a cold holding liable the company that contracted with the...

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