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Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

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United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 03-3345

No. 03-3346

___________

AgGrow Oils, L.L.C., *

*

Plaintiff - Appellee, *

*

v. * Appeals from the United States

* District Court for the

National Union Fire Insurance * District of North Dakota.

Company of Pittsburgh, PA; *

Anderson International Corporation, *

*

Defendants - Appellants. *

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Submitted: February 16, 2005

Filed: August 23, 2005

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Before LOKEN, Chief Judge, RILEY and SMITH, Circuit Judges.

___________

LOKEN, Chief Judge.

AgGrow Oils L.L.C. (AgGrow) hired T.E. Ibberson Company (Ibberson) to

design and build an oilseed processing plant in Carrington, North Dakota. Ibberson’s

performance as general contractor was secured by a bond issued by National Union

Fire Insurance Company of Pittsburgh (National Union). Anderson International

Corporation (Anderson) supplied critical seed processing equipment. Despite lengthy

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The HONORABLE RODNEY S. WEBB, United States District Judge for the

District of North Dakota.

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efforts to solve numerous problems, the completed plant was unable to meet promised

performance levels and closed. This complex litigation followed. 

Following an interlocutory appeal to resolve arbitration issues, AgGrow Oils

L.L.C. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 242 F.3d 777 (8th Cir. 2001),

the parties agreed that all disputes would be heard initially by a panel of special

masters, whose findings of fact would be final. After nine days of testimony, the

masters issued their Report, and all parties filed objections. In a thorough opinion,

the district court1

 modified some conclusions of law, adopted the masters’ ultimate

recommendations, and ordered that Ibberson and National Union are jointly and

severally liable to AgGrow in the amount of $2,578,840.53 and Anderson is jointly

and severally liable to AgGrow for $900,794.20 of Ibberson’s and National Union’s

total liability. AgGrow Oils L.L.C. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA,

276 F. Supp. 2d 999 (D.N.D. 2003). National Union and Anderson appeal. We

affirm.

I. National Union’s Appeal.

The special masters found that National Union issued a bond guaranteeing

Ibberson’s performance on the AgGrow project, that Ibberson breached its contract

with AgGrow, that “[t]he performance bond issued by National Union was properly

invoked by AgGrow,” and therefore that National Union is jointly and severally liable

with Ibberson for project costs incurred by AgGrow as a result of the breach. The

district court then ruled that National Union is also jointly and severally liable for

AgGrow’s consequential damages (lost profits), making Ibberson and National Union

jointly and severally liable for AgGrow’s entire $2,578,840.53 recovery. 

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Rule 53 was substantially rewritten in 2003. Present Rule 53(g)(3)(B) also

permits parties to agree that a master’s findings will be “final.”

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On appeal, National Union argues it is not liable on the performance bond

because the evidence establishes that AgGrow never properly invoked the bond,

despite the special masters’ finding to the contrary. Specifically, National Union

argues that the district court lacked “jurisdiction” to find that National Union waived

compliance with certain bond conditions precedent -- that AgGrow as project owner

must declare Ibberson’s default, formally terminate Ibberson’s right to complete the

contract, and agree to pay the balance of the contract price to National Union or to a

contractor selected to perform the contract. Alternatively, National Union argues that

waiver is an issue of fact and the district court erred in summarily deciding the issue

without notice to National Union and an evidentiary hearing.

At the time the parties consented to appointment of the special masters, Rule

53(e)(4) of the Federal Rules of Civil Procedure provided that, “when the parties

stipulate that a master’s findings of fact shall be final, only questions of law arising

upon the report shall thereafter be considered.”2

 In a breach of contract action,

whether a condition precedent to performance of the contract has been satisfied is an

issue of fact, not an issue of law. See Glatt v. Bank of Kirkwood Plaza, 383 N.W.2d

473, 480 (N.D. 1986); Reynolds v. Ashabranner, 207 S.W.2d 304, 307 (Ark. 1948).

Here, the special masters made the requisite ultimate finding -- “[t]he performance

bond . . . was properly invoked.” The special masters were not required to make

subsidiary findings explaining how each condition precedent to National Union’s

obligations under the bond was satisfied. As this is entirely an issue of fact, Rule

54(e)(4) makes it unreviewable by this court or by the district court. See Gilbane

Bldg. Co. v. Fed. Reserve Bank of Richmond, 80 F.3d 895, 905 (4th Cir. 1996).

Thus, we need not review the district court’s ruling as to waiver. 

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Alternatively, we agree with the district court’s resolution of this issue. The

special masters specifically found that, during the negotiations when AgGrow

declared Ibberson in default, “National Union . . . advised AgGrow that Ibberson had

‘completed its work’” and that “National Union declined to complete performance

under the Contract.” The district court reasoned that these findings were sufficient

to support the ultimate finding that the bond was properly invoked because National

Union’s unequivocal declarations rendered compliance with the additional bond

conditions a “useless formality.” This analysis is consistent with the factual record

and is in accord with North Dakota law. See Fargo Pub. Library v. City of Fargo

Urban Renewal Agency, 185 N.W.2d 500, 505 (N.D. 1971). National Union’s

suggestion that the district court’s decision was an unfair surprise is without merit.

For these reasons, the district court’s judgment holding National Union liable

on the bond must be affirmed.

II. Anderson’s Appeal.

The special masters found that the contract between general contractor

Ibberson and supplier Anderson included a written guarantee by Anderson that, if its

expander and expeller equipment received properly prepared oilseeds, the equipment

would process 200 tons of seed per day and produce “expeller cake” containing only

5-8% residual oil. Rejecting Anderson’s claim to the contrary, the special masters

found that Anderson’s equipment “did not perform adequately to produce the

guaranteed levels for these oilseeds even when the oilseeds provided to the Anderson

equipment were in substantial conformity with stated specifications.” The special

masters further found that Anderson breached a duty to cooperate and that Anderson

agreed to indemnify Ibberson for losses arising from these breaches. Accordingly,

the masters recommended that Anderson be jointly and severally liable for thirty

percent of AgGrow’s costs to complete the plant and forty percent of AgGrow’s lost

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profits. However, the special masters concluded that AgGrow was barred from

recovering directly from Anderson by lack of privity and the economic loss doctrine.

The district court concluded: (i) the contract between Ibberson and Anderson

included production guarantees and a duty to cooperate; (ii) the special masters’

findings that Anderson breached these provisions are unreviewable findings of fact;

(iii) under § 2-207 of the Uniform Commercial Code as adopted in North Dakota,

N.D.CENT.CODE § 41-02-14, the contract did not contain a promise by Anderson to

indemnify Ibberson; but (iv) Anderson is directly liable to AgGrow as a third party

beneficiary of the Ibberson - Anderson contract under N.D. CENT. CODE § 9-02-04.

Accordingly, the court adopted the special masters’ recommendation that Anderson

is jointly and severally liable for $900,794.20 of Ibberson’s total liability to AgGrow.

On appeal, Anderson first argues that the special masters and the district court

misread the Ibberson - Anderson contract by deriving production guarantees and a

promise to cooperate from provisions in the sales contract that instead defined duties

of Ibberson to Anderson. We disagree. As the district court noted, the terms of the

contract must be determined in accordance with UCC § 2-207(3), N.D. CENT. CODE

§ 41-02-14(3), because it arose by reason of the parties’ performance, rather than by

a written agreement. We agree with the district court that the contract proposals

exchanged by the parties, though inconsistent in other respects, were consistent with

regard to both the production guarantees, which were express warranties by Anderson

under UCC § 2-313, N.D.CENT.CODE § 41-02-30, and Anderson’s duty to cooperate

in achieving those guarantees. Thus, the district court correctly concluded that these

terms were part of the contract as a matter of law. Alternatively, if defining the terms

of a contract that is inherently ambiguous under UCC § 2-207 is an issue for the factfinder in North Dakota, then the special masters’ resolution of this issue was of

course final and unreviewable under Rule 53(e)(4).

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Anderson next argues it is not liable for breach of the production guarantees

because the plant never delivered oilseeds to the Anderson equipment that met the

required contract specifications. This is a question of fact under Rule 53(e)(4).

Anderson argues we may nonetheless review the masters’ adverse findings because

a finding of fact that lacks any evidentiary support is an error of law. We are

skeptical of this blatant attempt to avoid the parties’ stipulation that the masters’ fact

findings would be final. But in any event, as Anderson has not included in the record

on appeal the entire fact record before the special masters, we cannot review the

highly dubious assertion that there was no evidence to support the finding that

Anderson’s equipment failed to meet its production guarantees even when the plant

was able to deliver conforming oilseeds to that equipment. Therefore, even if the

district court erred in failing to consider this purported issue of law, we decline to

consider the alleged error because we cannot determine whether it was harmless. 

Finally, Anderson argues that, even if it did breach its contract with Ibberson,

the district court erred in holding Anderson directly liable to AgGrow as a third party

beneficiary of the contract because the special masters made no finding that AgGrow

was an intended third party beneficiary. The special masters’ Report did not discuss

the third-party beneficiary issue. But that is irrelevant. Though the inquiry is fact

intensive, numerous Supreme Court of North Dakota decisions establish that the

ultimate third party beneficiary determination is an issue of law. See First Fed. Sav.

& Loan Ass’n of Bismarck v. Compass Inv., Inc., 342 N.W.2d 214, 219 (N.D. 1983)

(“We conclude that as an incidental beneficiary . . . First Federal has no right to

enforce”); Apache Corp. v. MDU Res. Group, Inc., 603 N.W.2d 891, 894 (N.D. 1999)

(“we conclude the trial court did not err in concluding Apache was not a third-party

beneficiary”); O’Connell v. Entm’t Enters., Inc., 317 N.W.2d 385, 388 (N.D. 1982)

(we “conclude that O’Connell was merely an incidental beneficiary”). Thus, the

district court properly considered and decided the third party beneficiary issue of law

de novo, based upon the special masters’ findings and other relevant undisputed facts

in the record.

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Under North Dakota law, “[a] contract made expressly for the benefit of a third

person may be enforced by him.” N.D. Cent. Code § 9-02-04. However, “a party

only incidentally benefited by performance of a contract is not entitled to maintain an

action to enforce it.” Hellman v. Thiele, 413 N.W.2d 321, 325 (N.D. 1987). In

deciding whether a third party is only an incidental beneficiary, the Supreme Court

of North Dakota looks to the intent of the contracting parties, which it determines

from extrinsic evidence as well as from the four corners of the written contract when,

as here, the contract is ambiguous. First Federal, 342 N.W.2d at 217; O’Connell, 317

N.W.2d at 388. In this case, Anderson promised that its equipment would meet

production guarantees that Ibberson had warranted to AgGrow. “In such cases, if the

beneficiary [AgGrow] would be reasonable in relying on the promise [to Ibberson]

as manifesting an intention to confer a right on him, he is an intended beneficiary.”

Restatement (Second) of Contracts § 302 cmt. d (1979). 

Viewing the entire record, we agree with the district court that AgGrow was

an intended third party beneficiary entitled to enforce Anderson’s express production

guarantees in the Ibberson - Anderson contract. The special masters made the

following findings relevant to this issue:

• Prior to the formation of AgGrow, Anderson contracted with North

Dakota State University (NDSU) to prepare an engineering package for a

mechanical oilseed processing facility, working with John Gardner, a research

agronomist at NDSU’s Experiment Station in Carrington who later became the

general manager of AgGrow.

• AgGrow was then formed and decided to enter into a design/build

contract with a single firm. Before contracting with Ibberson, AgGrow told

Ibberson that AgGrow had chosen Anderson to provide the essential plant

equipment. Ibberson touted its familiarity with Anderson equipment. 

• Ibberson entered into a purchase agreement based on Anderson’s

February 4, 1997 proposal, which included Anderson’s production guarantees.

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AgGrow entered into the design/build contract with Ibberson on May 22, 1997.

Anderson’s guarantees were “the critical elements in the viability of AgGrow’s

plan for processing oilseeds” and were “instrumental” in the selection of

Anderson as equipment provider. 

• Anderson’s proposal to Ibberson contained a flow chart of the plant

containing the same elements as the flow chart Anderson previously submitted

directly to AgGrow, demonstrating that Anderson “was not merely a seller of

goods but provided extensive engineering requirements and parameters that

were integral to the engineering for the entire process.”

• Anderson’s engineering and performance commitments created a duty

to cooperate in the effort to attain the production guarantees following the

plant’s start-up.

In addition, the district court noted that the front cover of Anderson’s formal proposal

to Ibberson identified the AgGrow Oils Project, that Anderson’s letter accompanying

that proposal referenced the AgGrow Oils Project, and that the proposal included a

flow chart describing the planned operation of the AgGrow Oils plant.

In many (perhaps most) construction contract situations, the project owner will

not be an express third-party beneficiary who may directly enforce warranties made

by subcontractors or suppliers to the general contractor. See Restatement (Second)

of Contracts § 302 cmt. e, illus. 19. But this is not a typical situation. Anderson dealt

directly with AgGrow before Ibberson was retained as general contractor, and both

Anderson and Ibberson knew the production guarantees were critical to the economic

success of the project. The guarantees related to the post-completion operation of the

plant by AgGrow, and their attainment was likely to require both Anderson’s and

Ibberson’s cooperation. In these circumstances, well documented in the special

masters’ findings, the record supports the district court’s conclusion that AgGrow

may directly enforce the production guarantees as an express third-party beneficiary

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under § 9-02-04, whether the focus is the intent of the contracting parties, or the

reasonable understanding of the third party, AgGrow.

The judgment of the district court is affirmed.

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