Court Opinion

ID: 4250283
Source: CourtListenerOpinion
Date Created: 2018-02-28 21:24:25.743172+00
Date Added: 2024-06-11T14:44:15.121618
License: Public Domain

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.
                                     2

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.
                                         3

      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.
                                      4

      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.
                                      5

      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.
                                        6

       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
                                      8
      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.
                                      9

      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
                                      10

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
                                      11

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-
                                       12

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.