Court Opinion

ID: 1015215
Source: CourtListenerOpinion
Date Created: 2013-07-04 21:29:27.942411+00
Date Added: 2024-06-11T15:38:06.071892
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                              No. 04-1455

BIS COMPUTER SOLUTIONS, INCORPORATED,

                                               Plaintiff - Appellee,

          versus

CITY OF RICHMOND, VIRGINIA,

                    Defendant & Third Party Plaintiff - Appellant,

          versus

HALIFAX CORPORATION,

                                              Third Party Defendant.

                              No. 04-1466

BIS COMPUTER SOLUTIONS, INCORPORATED,

                                              Plaintiff - Appellant,

          versus

CITY OF RICHMOND, VIRGINIA,

                       Defendant & Third Party Plaintiff - Appellee,

          versus

HALIFAX CORPORATION,

                                              Third Party Defendant.
Appeals from the United States District Court for the Eastern
District of Virginia, at Richmond.  Henry E. Hudson, District
Judge. (CA-02-889-3)

Argued:   October 27, 2004              Decided:   January 13, 2005

Before WILKINS, Chief Judge, NIEMEYER, Circuit Judge, and Glen E.
CONRAD, United States District Judge for the Western District of
Virginia, sitting by designation.

Vacated and remanded by unpublished opinion. Judge Niemeyer wrote
the opinion, in which Chief Judge Wilkins and Judge Conrad joined.

ARGUED: Beverly Agee Burton, Senior Assistant City Attorney, CITY
ATTORNEY’S OFFICE, Richmond, Virginia, for City of Richmond,
Virginia. Gary Robert Reinhardt, KALBAUGH, PFUND & MESSERSMITH,
P.C., Richmond, Virginia, for BIS Computer Solutions, Incorporated.
ON BRIEF: Vicki West Harris, Assistant City Attorney, CITY
ATTORNEY’S OFFICE, Richmond, Virginia, for City of Richmond,
Virginia.   W. Barry Montgomery, KALBAUGH, PFUND & MESSERSMITH,
P.C., Richmond, Virginia, for BIS Computer Solutions, Incorporated.

Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).

                               -2-
NIEMEYER, Circuit Judge:

            BIS   Computer   Solutions,   Inc.   ("BIS")   commenced   this

action against the City of Richmond, Virginia (the "City") for

breach of a contract between the City and Halifax Corporation. The

contract provided for the creation, installation, and maintenance

of a computerized records management system for the Richmond Police

Department.    After the district court concluded as a matter of law

that BIS, a subcontractor, was entitled to sue on the contract as

a third-party beneficiary, a jury returned a verdict in favor of

BIS in the amount of $2,248,775 plus interest at 8% from November

22, 2000.      The district court remitted the award and entered

judgment in favor of BIS in the amount of $1,630,451, limiting

interest to a portion of the award.

            Because we conclude as a matter of law that BIS was

neither a party to the contract between the City and Halifax nor an

intended third-party beneficiary, it may not sue on the contract.

Accordingly, we vacate the district court's judgment and remand

with instructions to the district court to enter judgment in favor

of the City.

                                    I

            The City and Halifax Corporation entered into a "Service

Contract" dated March 22, 2000, under which Halifax agreed to

provide the City with a specified computerized system to manage its

police   department    records.     The   contract    divided   Halifax's

                                   -3-
performance into two phases and provided that "payment for the

first phase and continuation to the second phase depend[ed] upon

successful completion of the first phase."   Successful completion

was to be determined by "acceptance testing," through which the

City would confirm that the application software was free of "Level

1 or Level 2 Bugs."       If any such bugs existed, the contract

provided that the City could, "at its sole discretion," terminate

the contract.

          The contract recognized that Halifax had "engaged BIS to

meet certain of its requirements and responsibilities under the

terms of this Contract," and the City insisted that Halifax "not

change its subcontractor during the performance of this Contract

. . . without the written approval of City."    Accordingly, after

entering into the contract with the City, Halifax entered into a

subcontract with BIS.

          Halifax completed the first phase of the contract in

August 2000, and subsequent testing resulted in the discovery of a

number of data conversion problems, which required Halifax to

revise the software.    The City resumed its testing on November 5,

2000, and following a week of analysis, it concluded that the

software continued to contain what it considered to be "Level 1 or

Level 2 Bugs."   Accordingly, the City terminated the contract on

November 20, 2000.   As of that time, the City had paid Halifax all

invoices that Halifax had submitted, and Halifax submitted no

                                 -4-
further invoices to the City.            Moreover, Halifax has raised no

objection to the City's termination of the contract.

            Notwithstanding Halifax's stance, BIS commenced this

action against the City, alleging that the City breached its

contract with Halifax and committed other violations of law,

including violation of Virginia's Uniform Computer Information

Transaction Act, violation of the UCC, and the common law torts of

negligence, actual fraud, constructive fraud, tortious interference

with   a   contract,    and   tortious      interference    with     contractual

expectancy.    BIS also alleged damages for quantum meruit.

            The City filed a motion for summary judgment directed to

the merits of each count and contending with respect to all counts

that BIS was not an intended third-party beneficiary entitled to

sue under the contract between the City and Halifax.                 BIS filed a

cross-motion for summary judgment requesting a declaration that it

was an intended third-party beneficiary of the contract.

            By an order dated August 4, 2003, the district court

granted the City's summary judgment motion as to all of BIS's

claims except breach of contract and quantum meruit.                  The court

also   found   as   a   matter   of   law    that   BIS    was   a   third-party

beneficiary entitled to sue under the contract between the City and

Halifax.

            A jury trial was held on September 3 and 4, 2003, during

which the district court dismissed BIS's quantum meruit claim.                On

                                      -5-
the remaining breach of contract claim, the jury returned a verdict

for BIS and awarded damages of over $2.2 million plus prejudgment

interest.    On the City's motion for judgment as a matter of law,

the district court denied the motion with respect to liability, but

reduced BIS's damage award to approximately $1.6 million and

limited the award of prejudgment interest so that it applied to

only $507,000 of the award.

            From the district court's judgment, the City appealed,

contending principally that the district court erred as a matter of

law in concluding that BIS was an intended third-party beneficiary

of the contract between the City and Halifax.           It also contends

that the evidence was insufficient to show that the City breached

its contract with Halifax and that the evidence was insufficient to

support the jury's award of damages.          BIS filed a cross-appeal,

challenging the district court's reduction of prejudgment interest.

                                     II

            Addressing first the district court's ruling on the

third-party beneficiary issue, we review the district court's order

de novo, see Henson v. Liggett Group, Inc., 61 F.3d 270, 274 (4th

Cir. 1995), and apply Virginia substantive law.

            The facts relevant to whether BIS was an intended third-

party beneficiary are not disputed.         BIS was not a party to the

contract between the City and Halifax, although it was a designated

subcontractor   that   could   not    be   changed   without   the   City's

                                     -6-
permission.   The contract was a services contract entered into to

provide the City with a computerized system to manage its police

department records in exchange for compensation payable to Halifax.

There is nothing in the record to indicate that the contract was

entered into for any other purpose.

          Virginia third-party-beneficiary law is based on section

55-22 of the Virginia Code, which provides that:

     An immediate estate or interest in or the benefit of a
     condition respecting any estate may be taken by a person
     under an instrument, although he be not a party thereto;
     and if a covenant or promise be made for the benefit, in
     whole or in part, of a person with whom it is not made,
     or with whom it is made jointly with others, such person,
     whether named in the instrument or not, may maintain in
     his own name any action thereon which he might maintain
     in case it had been made with him only and the
     consideration had moved from him to the party making such
     covenant or promise. . . .

It is well-settled that this provision "enables a third party to

take an interest under an instrument, although not a party to it,

if the promise is made for the third party's benefit and the

evidence shows that the contracting parties clearly and definitely

intended to confer a benefit upon such third party."    Ashmore v.

Herbie Morewitz, Inc., 475 S.E.2d 271, 275 (Va. 1996) (emphasis

added).   But "a person who benefits only incidentally from a

contract between others cannot sue thereon." Copenhaver v. Rogers,

384 S.E.2d 593, 596 (Va. 1989).

                                  -7-
          Section 55-22 and the relevant Virginia common law are

also consistent with contract law generally. Section 302(1) of the

Restatement (Second) of Contracts provides that:

     . . . 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 . . . the circumstances
     indicate that the promisee intends to give the
     beneficiary the benefit of the promised performance.

Restatement (Second) of Contracts § 302(1) (1981).    Part (2) of §

302 defines an "incidental beneficiary" as "a beneficiary who is

not an intended beneficiary," and illustrations 17 and 19 of § 302

make clear that BIS falls into this latter category:

     17. B contracts with A to buy a new car manufactured by
     C.   C is an incidental beneficiary, even though the
     promise can only be performed if money is paid to C.

                           *     *     *

     19.   A contracts to erect a building for C.      B then
     contracts with A to supply lumber needed for the
     building. C is an incidental beneficiary of B's promise,
     and B is an incidental beneficiary of C's promise to pay
     A for the building.

Id. § 302 cmt. e, illus. 17, 19.           In contrast, the classic

situations of intended third-party beneficiaries involve creditor

beneficiaries, where the promisee is surety for the promisor,

see id. § 302 cmt. b, and donee beneficiaries, see id. § 302 cmt.

c.

          With these principles in mind, it is clear that, as a

matter of law, BIS was merely an incidental third-party beneficiary

of the contract.   While the recognition of BIS as a subcontractor

                                -8-
may   have   added   to    the   City's    comfort   in    being   assured    that

performance of the contract would be satisfactorily completed, the

City surely did not secure a records management system in order to

benefit BIS or any other subcontractor.                   It did so solely to

benefit itself and its police department, and any benefit to BIS

and other subcontractors was incidental.             For example, in Valley

Landscape Co., Inc. v. Rolland, 237 S.E.2d 120 (Va. 1977), the

Supreme Court of Virginia explained that the primary purpose of a

contract between a property owner and an architect was "to assure

that the owner [would] get a finished product in accordance with

the plans" he had approved.           Id. at 122.         Therefore, the court

held, a contractor of the owner could not bring suit as an intended

third-party    beneficiary       against    the   architect.       Id.   at   124.

Similarly in this case, the primary purpose of the contract between

the City and Halifax was to assure that the City would receive a

working records management system for its police department in

accordance with the contractual specifications, and BIS cannot

bring suit as an intended third-party beneficiary.

             The nature of the contract between the City and Halifax

is essentially analogous to any standard construction contract in

which a property owner retains a contractor to complete a project,

and the contractor hires subcontractors to assist in performing the

contractor's work.        Unless the parties otherwise specify, the sole

intended beneficiaries of any such contract are the property owner

                                      -9-
and the contractor.   Any third party benefiting from the contract,

such as a subcontractor, is only an incidental beneficiary.      And

under Virginia law and under contract law generally, such an

incidental beneficiary of a contract who is not a party to the

contract may not sue for breach of that contract.       See Va. Code

Ann. § 55-22; Restatement (Second) of Contracts § 302 (1981).

          Were we to hold that BIS was an intended beneficiary of

the contract between the City and Halifax, we would be broadening

the third-party beneficiary doctrine inappropriately.       This is

especially clear in this case because the contracting parties

apparently have no dispute.    The City paid all invoices submitted

by Halifax to the City, and Halifax made no objection to the City's

termination of the contract.    If Halifax has not paid BIS under

their subcontract, that is a matter between them.

          Because BIS was not an intended third-party beneficiary

entitled to sue under a contract to which it was not a party, we

vacate the judgment entered by the district court and remand with

instructions to enter judgment in favor of the City.*

                                               VACATED AND REMANDED

     *
      In view of our disposition of the third-party beneficiary
issue, we need not address the other issues raised by the City and
by BIS.

                                -10-