RPC Liquidation Vs. Iowa Department Of Transportation ( 2006 )

IN THE SUPREME COURT OF IOWA
No. 47 / 04-1584
Filed June 2, 2006
RPC LIQUIDATION,
Appellee,
vs.
IOWA DEPARTMENT OF TRANSPORTATION,
Appellant.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Des Moines County, John G.
Linn, Judge.
The Iowa Department of Transportation appeals from judgment
entered following a bench trial that concluded a material supplier had third-
party beneficiary status under a construction contract and that the Iowa
Department of Transportation breached the contract. DECISION OF
COURT OF APPEALS VACATED; DISTRICT COURT JUDGMENT
REVERSED AND CASE REMANDED WITH DIRECTIONS.
Thomas J. Miller, Attorney General, Mark Hunacek, Assistant
Attorney General, for appellant.
Robert W. Goodwin, Goodwin Law Office, P.C., Ames, for appellee.
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LAVORATO, Chief Justice.
In this breach-of-contract action, we must decide whether several
contracts conferred third-party beneficiary status on a material supplier.
Following a bench trial, the district court held that they did. Because, as a
matter of law, we conclude otherwise, we vacate the court of appeals
decision, reverse the district court judgment, and remand the case with
directions.
I. Background Facts and Proceedings.
The Iowa Department of Transportation (IDOT) had a construction
project on part of U.S. Highway 218 near Mount Pleasant, Iowa. As a result
of that project, the IDOT entered into contracts for bridge construction with
contractors for the work. At issue are contracts that identify Raider Precast
Concrete, Inc., now known as RPC Liquidation, as a source of material.
RPC was not a signatory to the contracts. RPC fabricated the beams that
were used by the contractors in the bridge construction.
W.W. Transport hauled a load of concrete aggregate from Missouri to
RPC’s fabrication plant in West Burlington, Iowa. Before this trip, W.W.
Transport had hauled soybeans from Iowa to Missouri. When the concrete
aggregate arrived at RPC’s plant, an RPC inspector discovered soybeans in
the aggregate, apparently because of W.W. Transport’s previous shipment of
soybeans. The inspector recommended that the aggregate not be used for
the fabrication of the beams, a recommendation that RPC approved. RPC
terminated its contract with W.W. Transport to haul coarse aggregate to
RPC’s plant.
Several weeks later an IDOT inspector who was on RPC’s premises
discovered that eleven beams RPC had fabricated showed soybean
contamination. Later the IDOT rejected ten of the eleven beams because of
the contamination.
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RPC and W.W. Transport sued the IDOT. Both plaintiffs alleged that
they were third-party beneficiaries to the contracts between the IDOT and
the contractors. RPC alleged that the IDOT’s rejection of the ten beams was
a violation of the contracts resulting in damages to RPC. W.W. Transport
alleged that as a result of the IDOT’s rejection of the beams, W.W. Transport
lost its contract with RPC to haul coarse aggregate to RPC’s plant resulting
in damages to it. In its answer to the allegations of both plaintiffs, the IDOT
alleged that the contracts specifically provided that there are no third-party
beneficiaries and that neither party is a third-party beneficiary to the
contracts referred to in the petition.
The IDOT moved for summary judgment, contending that neither
party was a third-party beneficiary of the contracts in question. The district
court denied the motion as to RPC but granted it as to W.W. Transport.
W.W. Transport has not appealed and is not involved in these proceedings.
The case was tried to the court, following which, the court ruled that
RPC was a third-party beneficiary to the contracts and that the IDOT had
breached the contracts by rejecting the ten beams. The court awarded RPC
damages in the amount of $103,589.
The IDOT appealed, and we transferred the case to the court of
appeals, which summarily affirmed the district court ruling. We granted the
IDOT’s application for further review.
II. Issues.
The issues are whether RPC was a third-party beneficiary under the
contracts between the IDOT and the contractors and if so, whether the
IDOT’s rejection of the beams containing soybeans was a breach of the
contracts. Because we conclude RPC was not a third-party beneficiary, we
do not address the damages issue.
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III. Scope of Review.
This contract case was brought as a law action. Our review is
therefore for correction of errors at law. See Fausel v. JRJ Enters., Inc., 603
N.W.2d 612, 617 (Iowa 1999). The third-party beneficiary question is a
legal issue, one for the court. Therefore we are not bound by the legal
conclusions of the district court. Id.IV. Third-Party Beneficiary.
A. Applicable law. In Midwest Dredging Co. v. McAninch Corp., we
adopted Restatement (Second) of Contracts section 302 relating to third-
party beneficiaries. 424 N.W.2d 216, 224 (Iowa 1988). Section 302
provides:
(1) Unless otherwise agreed between promisor and promisee, a
beneficiary of a promise is an intended beneficiary if
recognition of a right to performance in the beneficiary is
appropriate to effectuate the intention of the parties and either
(a) the performance of the promise will satisfy an
obligation of the promisee to pay money to the beneficiary; or
(b) the circumstances indicate that the promisee intends to
give the beneficiary the benefit of the promised performance.
(2) An incidental beneficiary is a beneficiary who is not an
intended beneficiary.
Restatement (Second) of Contracts § 302, at 439-40 (1981) (emphasis
added).
The primary question in a third-party beneficiary case is “whether the
contract manifests an intent to benefit a third party.” Midwest Dredging,
424 N.W.2d at 224. Such intent, however, need not benefit a third party
directly. Vogan v. Hayes Appraisal Assocs., Inc., 588 N.W.2d 420, 423 (Iowa
1999). In applying section 302, we have noted that the promisee’s intent
generally controls. Midwest Dredging, 424 N.W.2d at 224. In determining
such intent, we look to the language of the contract and to the
circumstances surrounding it. Id. at 225.
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When two or more parties enter into a contract, they have separate
purposes and may be stimulated by various motives. Vogan, 588 N.W.2d at
423. A person claiming to be a third-party beneficiary may not be acutely
aware of those motives. Id. The general rule is that
“ ‘[a] third party who is not a promisee and who gave no
consideration has an enforceable right by reason of a contract
made by two others . . . if the promised performance will be of
pecuniary benefit to [the third party] and the contract is so
expressed as to give the promisor reason to know that such
benefit is contemplated by the promisee as one of the
motivating causes of his making the contract.’ ”
Id. at 423-24 (second alteration in original) (omission in original) (citations
omitted).
When a contract expressly negates the creation of third-party
beneficiaries, we have rejected the claim that such status exists. See
Walters v. Kautzky, 680 N.W.2d 1, 4 (Iowa 2004). In Walters, prison
inmates sued the Iowa State Penitentiary claiming to be third-party
beneficiaries of an agreement between the Iowa Department of Corrections
and the state public defender. Id. at 2. The agreement provided that the
state public defender would provide limited legal assistance to prison
inmates. Id. at 2-3. “The agreement expressly stated that ‘[t]here are no
third party beneficiaries to this Agreement. This Agreement is intended only
to benefit the [Department of Corrections] and the Public Defender.’ ” Id.(first alteration in original). The agreement provided that the state public
defender could contract with private attorneys to provide those services. Id.The state public defender contracted with an attorney to advise inmates at
the state penitentiary. Id. The attorney refused to provide services
requested by the inmates because the agreement did not provide for
performing such services. Id. at 3-4.
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In rejecting the inmates’ third-party beneficiary claim, we relied on
the opening language in section 302 of the Restatement (Second) of
Contracts: “Unless otherwise agreed between promisor and promisee.” Id.
at 4. In relying on this language we said:
The agreement between [the Department of Corrections] and
[the state public defender] expressly negates an intention to
benefit the inmates of the institution where the legal services
were to be provided. Because [the attorney’s] contract served
as the implementation of [the state public defender’s]
agreement with [the Department of Corrections], it must be
viewed as similarly limited as to the persons to be benefited.
Id. at 4.
B. Analysis. The contracts between the IDOT and the contractors
incorporated by reference certain standard specifications. One of these
specifications, which is central to this appeal, provided in part:
1107.12 RESPONSIBILITY FOR DAMAGE CLAIMS.
Notwithstanding the above, it is specifically agreed between the
parties executing this contract that it is not intended by any of the
provisions of any part of the contract documents to create in the
public or any member thereof a third party beneficiary
hereunder, or to authorize anyone not a party to this contract to
maintain a suit for personal injuries or property damage pursuant
to the terms or provisions of this contract. The duties,
obligations, and responsibilities of the parties to this contract
with respect to third parties shall remain as imposed by law. . . .
It is understood that no subcontractor is a third party
beneficiary to any contract between the Contracting Authority
and the prime contractor. Nothing in any special provision or
any supplemental specification shall be construed as
eliminating or superseding the requirements of this section.
(Emphasis added.)
In finding that RPC was a third-party beneficiary, the district court
first determined that the express disclaimer regarding third party
beneficiary status in specification 1107.12 did not preclude RPC from
asserting such status. The court then focused on section 302 of
Restatement (Second) of Contracts to determine if RPC was an intended
7
beneficiary under that provision. The court concluded that RPC was indeed
such an intended beneficiary.
As mentioned, section 302 of the Restatement (Second) of Contracts
begins with the language “Unless otherwise agreed between promisor and
promisee.” Pursuant to such language we conclude, contrary to the district
court, that the disclaimer in specification 1107.12 precluded RPC from
being a third-party beneficiary. Because of our conclusion, we limit our
discussion to the disclaimer. Resolving the disclaimer issue requires us to
construe specification 1107.12.
In deciding contract issues, our cases have frequently used the terms
“interpretation” and “construction” interchangeably despite their distinct
purposes. Connie’s Constr. Co. v. Fireman’s Fund Ins. Co., 227 N.W.2d 207,
210 (Iowa 1975). Interpretation concerns the meaning of words in a
contract, an issue for the court unless the meaning depends on extrinsic
evidence or on a choice among reasonable inferences from such evidence.
Id. Construction, on the other hand, concerns the legal effect of a contract,
an issue that as a matter of law the court decides. Id.Our task is to construe—that is, determine the legal effect of—
specification 1107.12 and determine whether it provides third-party
beneficiary status to RPC. That question turns on the parties’ intention. In
determining the parties’ intention we are bound by what the contract says
except in cases of ambiguity. State Public Defender v. Iowa Dist. Ct., 594
N.W.2d 34, 37 (Iowa 1999). And when the contract is not ambiguous, we
will enforce it as written. Id.The court construed the disclaimer on third-party beneficiary status
in specification 1107.12 this way:
Turning to the first sentence of [specification] 1107.12, it
is clear that a contractor must indemnify the IDOT for any
claim or lawsuit brought by a person against the IDOT for
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injuries or damage sustained by a person because of the
contractor’s acts, omissions, neglect, or use of unacceptable
materials. The second portion of the indemnification clause
authorizes the IDOT to retain money from the contractor until
any such claims or lawsuits are settled. The next sentence of
the paragraph starts with the phrase “notwithstanding the
above.” This next sentence deals with third parties, but refers
back to the preceding sentence. “Notwithstanding” means the
same as “in spite of.” This sentence must be construed as
meaning: in spite of the fact that it is agreed a contractor will
indemnify the IDOT, for any type of claim or lawsuit, no
member of the public can assert the status of being a third-
party beneficiary if maintaining a suit for personal injuries or
property damage. The first two sentences of [specification]
1107.12 read together require a contractor to indemnify the
IDOT for any claims or lawsuits brought and in spite of the fact
that the IDOT has a right of indemnification against a
contractor, this does not confer upon the public the status of
third-party beneficiary for any lawsuit against the contractor or
the IDOT for personal injuries or property damage. These two
sentences, combined, do not foreclose [RPC] from bringing a
third-party beneficiary contract claim. [RPC] is not bringing its
lawsuit against any of the bridge contractors. The issue before
the Court does not involve the IDOT pursuing indemnification
from any of the bridge contractors. In addition, [RPC] is not
alleging the IDOT caused personal injuries or property damage.
[Specification] 1107.12 does not explicitly bar or prevent [RPC]
from bringing this third-party beneficiary contract claim.
(Emphasis added).
Contrary to the district court’s reasoning, which RPC relies on here to
uphold the court’s ruling, we agree with the IDOT that the above italicized
language in specification 1107.12 unambiguously conveys two ideas. First,
there are no third-party beneficiaries to the contracts. The phrase “public
or any member thereof” is broad enough to express this idea. Second, none
of the provisions of the contracts is intended to authorize a non-signatory to
the contracts to maintain a suit for personal injuries or property damage
pursuant to the terms or provisions of the contracts. The use of the word
“or” clearly expresses the intent of the parties that they meant these two
separate ideas.
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In contrast, the district court’s construction (the language only meant
that “no member of the public can assert the status of being a third-party
beneficiary if maintaining a suit for personal injuries or property damage”)
conveys only the second idea. The court’s construction effectively renders
the first idea (there are no third-party beneficiaries to the contract)
meaningless and redundant. We therefore conclude that the first idea
clearly expresses the intent of the parties to exclude anyone from having
third-party beneficiary status. Such exclusion therefore necessarily
includes RPC. See Iowa Fuel & Minerals, Inc. v. Iowa State Bd. of Regents,
471 N.W.2d 859, 863 (Iowa 1991) (holding that a contract is construed as a
whole and that it is assumed in first instance that no part of it is
superfluous; an interpretation that gives a reasonable, lawful, and effective
meaning to all terms is preferred to an interpretation that leaves a part
unreasonable, unlawful, or of no effect); accord Restatement (Second) of
Contracts § 203(a), at 92-93; 17A Am. Jur. 2d Contracts § 377, at 364-66
(2004).
We likewise reject the district court’s construction that the use of the
word “notwithstanding” conveys the meaning that
in spite of the fact that it is agreed a contractor will indemnify
the IDOT, for any type of claim or lawsuit, no member of the
public can assert the status of being a third-party beneficiary if
maintaining a suit for personal injuries or property damage.
We do so for two reasons. First, we have already construed specification
1107.12 as prohibiting third-party beneficiaries to the contracts. The
prohibition against third-party beneficiary status is therefore not limited, as
the district court concluded, to members of the public bringing lawsuits
against the contracting authority for personal injuries and property damage.
Second, we think the word “notwithstanding” is used to avoid any
implication of a third-party beneficiary status from the indemnification
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language in the first part of specification 1107.12. This intent to avoid such
an implication is emphasized by the use of the following italicized language
in the clause prohibiting third-party beneficiary status:
Notwithstanding the above, it is specifically agreed between the
parties executing this contract that it is not intended by any of
the provisions of any part of the contract documents to create in
the public or any member thereof a third party beneficiary
hereunder, or to authorize anyone not a party to this contract
to maintain a suit for personal injuries or property damage
pursuant to the terms or provisions of this contract.
(Emphasis added.) Clearly the language “the provisions of any part of the
contract” and “pursuant to the terms or provisions of this contract” was
intended to refer back to the indemnification provision.
The district court noted that RPC did not bring its lawsuit against any
of the bridge contractors and that the IDOT did not pursue indemnification
from them. Like the IDOT, we think that if either scenario were the case,
that fact proves nothing regarding whether anyone can be a third-party
beneficiary to the contracts.
RPC also relies on this part of the district court reasoning to uphold
the court’s ruling:
This conclusion [relating to the court’s determination
that specification “1107.12 does not explicitly bar or prevent
[RPC] from bringing this third-party beneficiary contract claim”]
is further supported by the next sentence of the paragraph
which reads as follows: “The duties, obligations, and
responsibilities of the parties to this contract with respect to
third parties shall remain as imposed by law.” The law in Iowa
requires the Court to determine whether the contract as a
whole manifests an intent to benefit a third party. The first two
sentences of [specification 1107.12] do not negate third-party
beneficiary claims in a contract action. The third sentence
then requires the obligations of the contractor and the IDOT,
with respect to third parties, to remain as imposed by law.
We likewise reject this reasoning because we have already
determined, contrary to the district court’s conclusion, that specification
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1107.12 by express language bars the public or any member thereof, which
includes RPC, from claiming third-party beneficiary status concerning the
contracts. Additionally, the language “The duties, obligations, and
responsibilities of the parties to this contract with respect to third parties
shall remain as imposed by law” does not change this determination. As
the IDOT points out, such language merely directs the parties to existing
law to determine what, if any, obligations are owed to an intended
beneficiary. Although such language appears somewhat redundant or
superfluous, it in no sense establishes an intent to create third-party
beneficiary status or to negate the third-party beneficiary disclaimer
language in specification 1107.12. Later in this opinion, we point out that
the use of redundant or superfluous language is not always outcome-
determinative.
Finally, RPC relies on this part of the district court reasoning to
uphold the court’s ruling:
The first sentence of the second paragraph of
[specification] 1107.12 contains a clear pronouncement that no
subcontractor is a third-party beneficiary to the contract.
IDOT specification 1101.03 defines the term “subcontractor.”
The parties agree that [RPC] is not a subcontractor for the
purpose of this lawsuit. [RPC] is a “source of material” for the
bridge construction project. If the IDOT intended to eliminate a
source of material as a third-party beneficiary, then the logical
place to insert the term would be the sentence which excludes
subcontractors from the third-party beneficiary status.
Because a source of material is not specifically excluded from
third-party beneficiary status, then the obligations of the IDOT
and the contractor, with respect to third parties, should remain
as imposed by law. Again, this goes back to construing the
contract as a whole to determine if [RPC] is an intended
beneficiary. In construing [specification] 1107.12, [RPC] is not
explicitly barred or excluded as a third-party beneficiary in
pursuing its contract claim against the IDOT.
In short, the court reasoned that because no subcontractor is a third-
party beneficiary, any entity other than a subcontractor would be a third-
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party beneficiary. As the IDOT asserts, this reasoning might be valid if the
only contractual provision relating to third-party beneficiary status was the
one that excluded subcontractors. See Maytag Co. v. Alward, 253 Iowa 455,
460, 112 N.W.2d 654, 656 (1962) (recognizing that the rule expressio unius
est exclusio alterius applies in the construction of contracts); Black’s Law
Dictionary 620 (8th ed. 2004) (defining expressio unius est exclusio alterius
as a “canon of construction holding that to express or include one thing
implies the exclusion of the other, or of the alternative”). The court’s
reasoning ignores the third-party beneficiary disclaimer language in the
preceding paragraph. See Estate of Pearson ex rel. Latta v. Interstate Power
& Light Co., 700 N.W.2d 333, 343 (Iowa 2005) (“We construe a contract in
its entirety by considering all of its pertinent provisions.”); see also 5
Margaret N. Kniffin, Corbin on Contracts § 24.28, at 317 (Joseph M. Perillo
ed., rev. ed. 1998) (“If a clearer source of information concerning the parties’
intentions is available, the court will decline to apply the maxim [expressio
unius est exclusio alterius].”).
The IDOT, however, concedes that reading the two provisions
together—the third-party beneficiary disclaimer and the subcontractor
language—does provide some “mild redundancy.” The IDOT explains away
this redundancy to our satisfaction. It notes that the paragraph on
subcontractors goes on to say: “Nothing in any special provision or any
supplemental specification shall be construed as eliminating or superseding
the requirements of this section.” The IDOT explains that this paragraph,
taken as a whole, was clearly intended to respond to our decision in
Midwest Dredging.
In Midwest Dredging, we took notice of several special provisions of
the contract between the IDOT and the contractor that overrode the
provisions of the contract and that required hydraulic dredging. 424
13
N.W.2d at 225. These special provisions led us to conclude that the
dredging contractor, as a third-party beneficiary, could enforce an implied
warranty by the IDOT that a pit designated by the IDOT could be
hydraulically dredged in accordance with its plans and specifications. Id.
Ultimately, it was discovered that the dredging was not feasible. Id. at 219.
The IDOT asserts here that the subcontractor language in specification
1107.12 was meant—even at the risk of redundancy—to ensure this
situation would never arise again.
Restatement (Second) of Contracts section 203, standards of
preference in interpretation, provides in relevant part the following:
In the interpretation of a promise or agreement or a term
thereof, the following standards of preference are generally
applicable:
(a) an interpretation which gives a reasonable, lawful,
and effective meaning to all the terms is preferred to an
interpretation which leaves a part unreasonable, unlawful, or
of no effect.
Restatement (Second) of Contracts § 203(a), at 92-93 (emphasis added);
accord Fashion Fabrics of Iowa, Inc. v. Retail Investors Corp., 266 N.W.2d 22,
26 (Iowa 1978). The key words in this provision are “generally” and
“preferred,” implying that some redundancy and superfluousness are to be
considered harmless.
Comment (b) to this section notes that “[s]ince an agreement is
interpreted as a whole, it is assumed in the first instance that no part of it
is superfluous.” Restatement (Second) of Contracts § 203 cmt. (b), at 93.
The comment, however, also recognizes that “[e]ven agreements tailored to
particular transactions sometimes include overlapping or redundant or
meaningless provisions.” Id.; see also Hubbard v. Marsh, 241 Iowa 163,
168, 40 N.W.2d 488, 491 (1950) (“ ‘[I]t is presumed that no words were used
14
aimlessly and that no provision is superfluous unless plainly repetitious.’ ”
(Citation omitted.)).
We think the district court’s reasoning takes what is harmless
redundancy and uses it to render what went before it meaningless. See Am.
Soil Processing, Inc. v. Iowa Comprehensive Petroleum Underground Storage
Tank Fund Bd., 586 N.W.2d 325, 334 (Iowa 1998) (holding that district
court’s construction of an agreement that rendered part of an agreement a
nullity violated the rule against construing a contract so that part of it is
unreasonable, unlawful, or of no effect). Moreover, as the IDOT makes
clear, it makes no sense to deny third-party beneficiary status to a
subcontractor but not to the materials supplier. The subcontractor is more
deserving of protection because the subcontractor has closer ties to the
contract than the materials supplier.
For all of these reasons we conclude as a matter of law that RPC is
not a third-party beneficiary to the contracts.
V. Disposition.
Because we find the district court erred as a matter of law in
interpreting the contracts as conferring third-party beneficiary status to
RPC, we vacate the court of appeals decision, reverse the district court
judgment, and remand the case for an order dismissing RPC’s petition.
DECISION OF COURT OF APPEALS VACATED; DISTRICT COURT
JUDGMENT REVERSED AND CASE REMANDED WITH DIRECTIONS.