Third-Party Beneficiaries of Municipal Contracts–More on Drury Co. v. Jackson R-2 School District

There does not appear to be an inherent inability at common law for an intended beneficiary to maintain a claim as a third-party beneficiary under a local government contract:

Whenever local law permits third-party beneficiaries to sue on contracts between others, they can sue on comparable local government contracts.

Chester James Antieau, Antieau on Local Government Law, § 32.12  (Sandra M. Stevenson, ed.) (2d ed., Lexis database, through December 2013; Release No. 126).  Were one to review 10A Eugene McQuillen, The Law of Municipal Corporations § 29:136 (3d ed. 2009 rev. vol), one would see, “The right of a third person to sue on a municipal contract has been denied in several decisions. However, in some circumstances such an action may be maintained ….”  McQuillen’s footnotes have such authority as referencing no recovery by an “incidental beneficiary” or “ordinarily, under New Mexico law, the obligations arising out of a contract are due only to those with whom it was made”.  So, without attempting to read each case cited by McQuillen, it would appear that Antieau has better-expressed the view.

Law Mo. Stat. 432.070 states:

No county, city, town, village, school township, school district or other municipal corporation shall make any contract, unless the same shall be within the scope of its powers or be expressly authorized by law, nor unless such contract be made upon a consideration wholly to be performed or executed subsequent to the making of the contract; and such contract, including the consideration, shall be in writing and dated when made, and shall be subscribed by the parties thereto, or their agents authorized by law and duly appointed and authorized in writing.

The school district in Drury Co. v. Jackson R-2 School District, 2014 WL 462916 (Mo. Ct. App., E.D. 2014), takes the position that the statute prevents third-party beneficiary claims against counties, etc.

An initial step in construing a provision, a statute as well as a contract, is ascertainment of the evident sense of the provision as a whole.  Let’s see if the argument is persuasive, particularly in regards to:

  • What particular language in the statute does the school district identify as the basis for holding third-party beneficiaries cannot enforce a written contract?
  • What statutory purposes does the school district identify that would be inhibited by allowing third-party beneficiaries to maintain actions?

More after the break …

Drury attempts to distinguish this case from Catapult Learning and Werner Brothers by arguing that the plaintiffs in those two cases were not asserting third-party beneficiary status and that contrary to the facts in those cases, it is a third-party beneficiary of the Contract between Penzel and the School District and that § 432.070 RSMo is therefore inapplicable. This argument fails for two reasons.

First, Drury is not a third-party beneficiary to the written contract between Penzel and the School District. … [Editor’s note:  That this claim is erroneous is the subject of a prior blog post]

Drury’s argument fails for a second reason; which is that even if Drury is a third-party beneficiary under the Contract, Drury cites no Missouri case for the proposition that § 432.070 RSMo should simply be ignored where a third-party beneficiary is involved. Drury cites to Knob Noster R-VIII Sch. Dist. v. Dankenbring, 220 S.W.3d 809, 818, n. 3 (Mo. App. W.D. 2007), to attempt to establish that a subcontractor can be a third-party beneficiary to a written contract between a general contractor and a school district. However, the terms of the Knob Noster contract specifically provide that the insurance “shall be written in the names of the Owner, Architects, and his Consultants, and Contractors and Subcontractors as their interest may appear.” Id. at 813. Here, the Contract simply states that “[t]his insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Project.” Moreover, Knob Noster does NOT address sovereign immunity or § 432.070 because the school made a claim with the insurance company and then the school sued the sub-contractor in subrogation.

Drury contends that it is “well established” that a third-party beneficiary can sue a public entity; however, each of the cases relied on by Drury can be distinguished. In State ex rel. Stern Bros. & Co. v. Stilley, 337 S.W.2d 934, 941 (Mo. 1960), the bondholders (private parties) were not suing the City mentioned in the case under any sort of third-party beneficiary theory; instead, the bondholders were suing the local water District based on contractual obligations the District had with the bondholders themselves via the bonds. In Volume Services, Inc. v. C.F. Murphy & Associates, Inc., 656 S.W.2d 785 (Mo. App. W.D. 1993), a third-party beneficiary analysis was done with respect to Count IX of the plaintiff’s petition, which only named the non-city or non-public entities involved. In St. Joseph Light & Power Co. v. Kaw Valley Tunneling, Inc., 589 S.W.2d 260 (Mo. banc 1979), the stated third-party beneficiary to a contract between a public entity and a private contractor sued the private contractor and not the public entity on its third-party beneficiary breach of contract claim. In City of Univ. City ex rel. & to Use of Mackey v. Frank Miceli & Sons Realty & Bldg. Co., 347 S.W.2d 131 (Mo. 1961), the plaintiffs were ten individuals prosecuting “at the relation” of University City, who were suing private development and indemnity companies.

Section 432.070 of the Missouri Revised Statutes precludes recovery by Drury because Drury and the School District do not have a written contract between them. Further, Drury is not a third-party beneficiary to the written contract between Penzel and the School District and even if it is, Drury cites no Missouri case for the proposition that § 432.070 RSMo should be ignored where a third-party beneficiary is involved.

2014 WL 462916, at *13-16.

Relevant Statutory Language

OK, so now we have our answer.  The school district does not identify particular language in the statute.  One supposes that is because nothing in the statute literally says what the school district would prefer.  Let us now divide it into components, and check each component:

Mo. Stat. 432.070 states no county, [etc.]… shall make any contract, unless (statutory language in italics; the parsing, underlined, following)

the same shall be within the scope of its powers or be expressly authorized by law,
–This part does not inherently prevent third-party beneficiary claims.
nor unless such contract be made upon a consideration wholly to be performed or executed subsequent to the making of the contract; and
–This part does not inherently prevent third-party beneficiary claims.
such contract, including the consideration, shall be in writing and dated when made, and
–This language only addresses that there be a writing and what’s in the writing; it does not prevent enforcement by third-party beneficiaries.
shall be subscribed by the parties thereto, or their agents authorized by law and duly appointed and authorized in writing.
–This language also does not inherently prevent third-party beneficiary claims.  It only requires the signatures of “parties thereto”.  “Thereto” evidently means “to that contract”.  A third-party beneficiary is not a “party”. For example: “Beneficiaries of contracts to which they are not parties have been divided into three classes, namely, donee beneficiaries, creditor beneficiaries, and incidental beneficiaries. Generally speaking, those in the first two classes have enforceable rights against the promisor, but those in the third class do not.”  Stephens v. Great Southern Sav. & Loan Ass’n, 421 S.W.2d 332, 335 (Mo. App. 1967). So, this part of the the statute also does not, by its terms, require the signature of a third-party beneficiary on the pertinent writing.

It would appear that the reason the school district chose not to parse the language of the statute is that, upon parsing it, one ascertains that there is nothing in the statute that prevents assertion of a claim by a third-party beneficiary.  OK, then, let us turn to the purposes.

No Statement of Purposes

Alas, detailed analysis of the relevant statutory purposes is also missing.  The origins of the statute, according to the legislative history on Westlaw (and confirmed by observations in Woolfolk v. Randolph County, 83 Mo. 501 (1884), are in legislation from 1874.

So, let us see what courts have identified as the underlying purposes:

In speaking of the purpose of the statute, 432.070, supra, this court said in the early case of Woolfolk v. Randolph County, 83 Mo. 501, the manifest purpose of the requirement is that the terms of the contract shall, in no essential particular, be left in doubt, or to be determined at some future time, but shall be fixed when the contract is entered into. This was one of the precautions taken to prevent extravagant demands, and to restrain officials from heedless and ill-considered engagements. See also Riley v. City of Rock Port, supra. The statute also safeguards against fraud and peculation. It specifically regulates the mode by which the business of a municipality is to be transacted. No contractual obligation is incurred by a Missouri city in the absence of the writing prescribed.

Bride v. City of Slater, 263 S.W.2d 22, 26 (Mo. 1953).

Let us turn to an (almost-contemporaneous) construction:

The manifest purpose of the requirement is that the terms of the contract shall, in no essential particular, be left in doubt, or to be determined at some future time, but shall be fixed when the contract is entered into. This was one of the precautions taken to prevent extravagant demands, and to restrain officials from heedless and ill-considered engagements.

Woolfolk v. Randolph County, 1884 WL 9510, at *3 (Mo. 1884).  This purpose is not inhibited by allowing intended beneficiaries to pursue claims for breach of contracts adequately detailed in writing.  Allowing third-party beneficiary claims would not expose the governmental entity to obligations that are not adequately defined.  Nor does it give rise to extravagant demands after having volunteered the provision of goods or services.

Conclusion

In sum, the statute does not by its literal terms prevent assertion of a third-party beneficiary claim.  And the identified purposes of the statute are not inhibited by recognition of a third-party beneficiary claim.  The proper resolution would seem reasonably clear.