Intended or incidental: the limits of the beneficiary's claim

Rensselaer, New York, the nineteen twenties. A water company has a contract with the city to supply water for years. Sewer flushing, street sprinkling, schools and public buildings, and service at the fire hydrants, at forty two dollars fifty a year for each hydrant. Water for private homes and factories at reasonable rates. While the contract is in force, a building catches fire. The company is told. The fire spreads to a warehouse nearby and destroys it and its contents.
The warehouse owner sues the water company. Its complaint says that the company 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, although it was equipped to do so and had agreed with the city to do so. The city paid for hydrant service. The hydrants were for fighting fires. The warehouse burned for want of water.
Surely, says the owner, I am who that promise was for.
So here is the question. Last lecture a creditor and a niece were allowed to sue on promises made to someone else. The warehouse owner is one of the inhabitants the city contracted to protect. Why should he be different? Think about it before I go on, because the judge who answers is Cardozo, and his answer is about where liability would stop if he said yes.
And now the question I keep asking. What exactly did these people promise each other? The company promised the city water at the hydrants for a fee. The city promised to pay. Today's question is who the promise was for, and the two cases pull in opposite directions. One says a promise to a city is not a promise to every citizen. The other says sometimes it is exactly that.
Here is the first line for the board. A beneficiary is intended only if the parties intended to give him the benefit of the performance, and it is not enough that he would gain if the promise were kept. The benefit must be one that is not merely incidental and secondary.
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.
Second line, for contracts with governments. A promisor bound to the government to render a service to the public is not liable to members of the public for failing to perform, 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. The presumption runs against the citizen's suit. It can be overcome.
Third line, and it is about scale. A promisor will not be deemed to have had in mind the assumption of a risk so overwhelming for any trivial reward. When the class of beneficiaries is everyone and the loss is unbounded, courts read the contract as a promise to the government alone. When the class is defined and the loss is the very sum the promise was about, courts read it as a promise to the class.
Now the case. H. R. Moch Company against Rensselaer Water Company, Court of Appeals of New York, nineteen twenty eight, Chief Judge Cardozo. The warehouse owner argued three ways. Contract, under Lawrence against Fox. Tort, under MacPherson against Buick. And breach of statutory duty. Cardozo took them in turn, and rejected all three.
Contract first. No legal duty rests upon a city to supply its inhabitants with protection against fire. That being so, a member of the public may not maintain an action under Lawrence against 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.
He noticed how the contract was built. It 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. The hydrants were in the city's branch. The homes were in the citizens' branch.
The warehouse fire was a hydrant matter.
Then the general principle. 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. And his illustrations. 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 carrier of the mails is not answerable to the merchant who lost a bargain through delay. The law does not spread its protection so far.
Why not? Because of what saying yes would mean. 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. 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. Forty two dollars fifty a hydrant.
Cardozo was careful to say which public contracts do give citizens a claim. 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. A water company that fixed rates for private takers. A street railway that promised to carry passengers for a stated fare. Contractors on public works who promised not merely to indemnify the city, but to assume its liabilities.
The municipality was contracting in behalf of its inhabitants by covenants intended to be enforced by any of them severally as occasion should arise.
The tort argument failed for a related reason. The question, Cardozo said, 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. 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. The warehouse owner lost on every count.
Now the other direction. San Francisco, two thousand Broadway, the late nineteen seventies. An apartment building financed with a federally insured mortgage of more than five million dollars. In return for the government's guarantee, the landlords agreed with the Department of Housing and Urban Development to file a schedule of maximum rents and to charge no more without the department's approval. The tenants allege that the landlords charged more anyway, and collected over two million dollars in excess rents.
They sue as third party beneficiaries of the landlords' agreement with the government. The trial court throws them out. The government's contract, it says, is the government's to enforce.
The Court of Appeal, in Zigas against Superior Court, nineteen eighty one, Justice Feinberg, reversed. California has a statute. 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. But for government contracts the California Supreme Court had adopted the Restatement rule, the one on the board, and had refused a claim by residents of East Los Angeles under a job training contract.
So the court had to explain why these tenants were different from those trainees.
It gave five reasons, and they are a checklist. First, who lost. In the training case the contract said that on breach the contractor would refund the government's money, so it was the government that was out of pocket. Here the government suffered no loss as a consequence of the breach. It was the renter that suffered the direct pecuniary loss. Second, in the training case there was an administrative procedure for disputes.
Here there was none, and lawsuits such as this promote the federal interest by inducing compliance with the agreements.
Third, the training contract limited the contractor's liability, and a citizen's suit would have nullified the limited liability for which defendants bargained. Here there was no limited liability. Fourth, the training programme was one part of a broad, long-range objective for a neighbourhood. Here the purpose of the contract is narrow and specific, to provide moderate rental housing for families with children. Fifth, the agreement itself showed the intent. The rent ceiling was obviously designed to protect the tenant against arbitrary increases in rents.
Certainly, it was not intended to benefit the government as a guarantor of the mortgage.
And the clause that clinched it. The landlords had agreed to be personally liable for funds of the project coming into their hands which they were not entitled to retain. They had retained over two million dollars. To whom should they be liable? To ask the question is to answer it. It is not the government from whom the money was exacted. It was taken from the tenants. Therefore, it should be returned to the tenants.
The court answered Cardozo's scale point too, in a footnote worth the whole case. The Restatement rule for government contracts, it said, was meant to preclude lawsuits for consequential damages, because the resulting potential liability may be disproportionately burdensome in relation to the value of the promised performance. That rationale is inapplicable where, as here, the money sought is not a consequence of the breach, it is the breach. The warehouse owner wanted his warehouse. The tenants wanted their rent back.
Put the two cases side by side. Moch, a promise to a city to keep water in the hydrants, for a small fee, invoked by a citizen for the loss of a building. Incidental, because the burden would be crushing, unbounded, and unpriced. Zigas, a promise to the government to charge tenants no more than a schedule, invoked by the tenants for the overcharge.
Intended, because the class was defined, the loss was exactly the sum promised, and the government had no interest in keeping it. Same doctrine. Opposite answers, and both right.
Now let's change one fact. The Rensselaer contract had said, the company shall be liable to any owner of property within the city for loss by fire caused by its failure to maintain the agreed pressure at the hydrants. Choose an answer before I go on.
Now the warehouse owner wins. Cardozo's rule was a presumption about what the parties intended, and the parties can rebut it in words. He said so himself. The cases that let citizens sue all showed an intention to compensate the individual members of the public in the event of a default. A clause like that is that intention. The company would have priced the risk, or refused the clause. Having accepted it, it pays.
Change one fact again. The tenants in San Francisco sued not for the overcharged rent but for the emotional distress and the moving costs of families who had left because the rent was too high. Choose.
Now Zigas itself tells you the answer changes. The court distinguished the restrictive Restatement rule because the money sought was the breach, not a consequence of it. Consequential damages to an open-ended class of former tenants is exactly the disproportionately burdensome liability that rule exists to prevent. The tenants who paid the excess get it back. The consequential claims fall under Moch's reasoning.
Change one fact a third time. The warehouse owner in Rensselaer had been a private taker with his own contract for water to his building, and the pressure failure had been in the pipe to his sprinklers. Choose.
Now he is in the other branch of the contract, the promise to the city for the benefit of private takers, and Cardozo said the water company's promise there was for them. Better still, he has his own contract with the company, and is a party, not a beneficiary at all. The two-branch structure of the Moch contract is why the case came out as it did. A fire fought from hydrants was the city's business. Water to a customer's building was the customer's.
Here is what people get wrong here, and why it is tempting. The first mistake is thinking that because a contract with a government is for the public, every member of the public may sue on it. The presumption is the other way. The second mistake is thinking the presumption cannot be rebutted. Fixed rates for takers, fares for passengers, rent ceilings for tenants, and express compensation clauses all rebut it.
The third mistake is missing the scale question. Ask what the promisor would be taking on if the citizen could sue. If it is the whole city's losses for a trivial fee, the court will not find the intent. If it is the return of the very sum the promise fixed, it will.
Here is the rule, in one breath.
A person who would gain from performance is an intended beneficiary only where the parties meant the performance for him, and a promisor who contracts with a government to serve the public is not liable to members of the public unless the contract, read in its circumstances, shows an intention that he compensate them, which courts find where the class is defined and the loss is the promised sum itself, and refuse where the liability would be unbounded and unpriced. Now, five questions.