Court Opinion

ID: 7010801
Source: CourtListenerOpinion
Date Created: 2022-07-24 04:05:35.418544+00
Date Added: 2024-06-11T16:10:12.792699
License: Public Domain

O’SCANNLAIN, Circuit Judge,
dissenting.
I respectfully dissent from the court’s determination that the state and federal governments were intended beneficiaries of the surety bond insuring Hawaiian Foliage and Landscape’s (“Hawaiian”) performance. The purpose and language of the surety bond nowhere evinces an intent that Island Insurance Co. (“Island”) be held liable for Hawaiian’s unpaid taxes. Indeed, as I explain below, it would have made little sense for the parties to enter into the agreement described by the majority.
I
I do not dispute the majority’s recital of the facts or the relevant language of the bond and subcontract. I part company, however, with its conclusion that the surety bond, which is clearly meant to protect Oahu Construction Co. (“Oahu”) from Hawaiian’s failure to perform and nowhere mentions the state or federal government *1169as beneficiaries, requires Island to pay Hawaiian’s taxes.
The bond provides that Island is liable if Hawaiian fails: (1) to duly and truly perform and to complete the subcontract, (2) to pay for all materials used in performance of the subcontract, and (3) to hold Oahu harmless from all claims for any labor and materials used in the performance of the subcontract. Because, in a litany of other provisions, Article XIV of the subcontract mentions Hawaiian’s responsibility to pay its own taxes, the majority divines that Hawaiian’s failure to pay such taxes is a failure to “duly and truly perform and complete the subcontract” that triggers Island’s obligation under the bond. Even more problematic, instead of being obligated to Oahu — the entity the surety bond was meant to protect — the majority holds that Island must directly reimburse the state and federal governments.
However, it is hornbook law that only if the governments are intended beneficiaries of the surety bond — not just incidental beneficiaries — is Island obligated to pay the taxes owed by Hawaiian. See Pancakes of Hawaii, Inc. v. Pomare Prop. Corp., 85 Hawai'i 300, 944 P.2d 97, 106 (App.1997) (stating the general rule that a third party does not have enforceable contract rights unless it is an intended beneficiary). The contracting parties must have intended directly to benefit the third party. Wright v. Associated Ins. Cos., 29 F.3d 1244, 1249 (7th Cir.1994).
As the majority recognizes, the governments may be intended beneficiaries of the bond if “recognition of a right to performance in [the governments] is appropriate to effectuate the intention of the parties and ... the performance of the promise will satisfy an obligation of [Island] to pay money to the beneficiary.” Restatement (Second) of Contracts § 302(1)(a) (1979) [hereinafter “Restatement”]. The bond’s reference to the subcontract, which includes a provision requiring Hawaiian to pay its own taxes, seems to satisfy the majority that Island bound itself to pay those taxes should Hawaiian fail to do so. I am not persuaded.
True, the surety bond references the subcontract, which, in turn, required Hawaiian to pay its own taxes. However, that fact alone does not make the governments intended beneficiaries of the bond. We presume that parties contract for themselves alone, see United States v. Seaboard Surety Co., 201 F.Supp. 630, 636 (N.D.Tex.1961), so a party claiming intended beneficiary status bears the burden of showing that the contracting parties intended to confer a direct benefit on it, United States v. Md. Cas. Co., 323 F.2d 473, 476 (5th Cir.1963). “An intent to benefit the third party must be apparent from the construction of the contract in fight of all surrounding circumstances to qualify that party as a third party beneficiary.” O’Connor v. R.F. Lafferty & Co., 965 F.2d 893, 901 (10th Cir.1992).
II
The language of the bond indicates that the only identified and intended beneficiary of the bond is Oahu; it does not name the governments. The governments seize upon the fact that the bond and subcontract do not explicitly exclude them. However, to qualify as third party beneficiaries, the governments must show more than just that the original contracting parties did not consciously exclude them; rather, they must demonstrate that those parties intended to include them. Of course, the bond benefits entities to whom Oahu could be held liable in the event of a default by Hawaiian, such as those to whom Hawaiian might owe funds for materials and supplies, and for which Oahu, as the primary contractor, could be liable under state law. These suppliers are intended beneficiaries of the surety bond because *1170they were clearly contemplated by the parties — the bond requires that Hawaiian “hold Oahu harmless from all claims for any labor and materials used in the performance of the subcontract.” The governments are not so named.
Furthermore, the purpose of a performance bond is to guarantee to an obligee, such as Oahu, that its contract will be completed even if the subcontractor defaults. This generally involves the surety, here Island, agreeing to complete the construction or pay the obligee the reasonable costs of completing it. E.g., Aetna Cas. & Sur. Co. v. United States, 845 F.2d 971, 973-74 (Fed.Cir.1988). The primary and obvious reason to reference the subcontract in the bond is to establish the limits of and to aid in measuring Island’s obligation to Oahu under the bond.1 Indeed, virtually all of the provisions in the subcontract consist of obligations that Hawaiian undertakes for the benefit of Oahu: performance in a timely manner, obtaining insurance, providing qualified personnel, and indemnifying and defending Oahu against claims.
In construing contracts, we should adopt the interpretation that, under all circumstances, “ascribes the most reasonable, probable, and natural conduct of the parties, bearing in mind the objects to be accomplished.” Alliance Metals, Inc. v. Hinely Indus., 222 F.3d 895, 901 (11th Cir.2000) (quotations omitted); see also Am. Home Assurance v. Larkin Gen. Hosp., 593 So.2d 195, 197 (Fla.1992) (“To determine the intent of the parties, a court should consider the language in the contract, the subject matter of the contract, and the object and purpose of the contract.”). The purpose of this bond was to ensure to Oahu that Hawaiian’s portion of the project was completed, i.e., to protect Oahu from actual damages it could suffer if Hawaiian failed to perform.
Paying Hawaiian’s taxes has nothing to do with completing the actual construction of the project, particularly considering that Oahu needs no protection from Hawaiian’s tax liability since a general contractor is not liable for a subcontractor’s failure to pay its taxes. United States Fid. & Guar. Co. v. United States, 201 F.2d 118, 120 (10th Cir.1952) (employer’s duty to pay state and federal employment taxes “is a tax liability for which [it] alone is liable to the Government”). Hawaiian’s liability for its unpaid taxes could not have been imposed on Oahu, an innocent third party, because that duty inhered solely in Hawaiian.2 Thus, the bond, which was intended *1171only to protect Oahu (who needed no protection from Hawaiian’s tax liability), should not be read to protect the governments.3
The bond’s purpose becomes even more evident when one considers the result of the majority’s holding, which essentially ascribes to Oahu the intent to seek protection in a bond that harms, not guards, its interests. Allowing the governments to collect taxes from performance bonds reduces the amount of funds available to Oahu for completion of the project, payment to laborers, and payment of other damages that Oahu could incur as a result of Hawaiian’s default. For example, the owner of the golf course indicated that it might file a claim for alleged defects in Hawaiian’s work, involving almost $200,000 per hole of the golf course. The governments’ tax claims, not including interest and penalties, total almost $600,000. The sum of the bond is $2,698,787, of which $297,303 has already been expended for claims. When one considers the amount of the golf course’s potential claim, it becomes clear why Oahu would want the full amount of the bond available to cover claims against it. I cannot believe that the parties intended that this bond, which was meant to protect Oahu, would cover payments to taxing authorities, thereby reducing the bond’s value to Oahu by over 20 percent.4
Both Oahu and Hawaiian admit that they had no intention for the bond to cover Hawaiian’s tax obligations. See McCarthy v. Azure, 22 F.3d 351, 362 (1st Cir.1999) (“As is generally the case in matters of contract interpretation, ‘[t]he crux in third-party beneficiary analysis ... is the intent of the parties.’ ”) (quoting Mowbray v. Moseley, Hallgarten, Estabrook & Weeden, 795 F.2d 1111, 1117 (1st Cir.1986)). Indeed, as discussed above, it would make little sense for a general contractor like Oahu to seek such an arrangement. Neither the language nor the purpose of the bond lead me to conclude that the governments were intended beneficiaries of it.
Ill
The majority lists two instances in which a general contractor like Oahu might be affected if its subcontractor did not pay its taxes, supra at 1166. However, the fact that Oahu may have self-protective reasons for requiring Hawaiian to pay its taxes does not establish that the governments are intended beneficiaries of Oahu’s subcontract and bond. Rather, as Island argues, it demonstrates that the subcontract’s tax provisions are for the primary benefit of the general contractor and only incidentally for the benefit of any taxing authority. See Seaboard Surety Co., 201 F.Supp. at 635 (holding that a provision requiring subcontractor to pay taxes did not evidence an intent to benefit the United States, but showed instead that the general contractor was primarily concerned with its own position). One should *1172remember that incidental beneficiaries have no legal right to enforce a contract. Eastman v. McGowan, 86 Hawai’i 21, 946 P.2d 1317, 1324 (1997). If Hawaiian’s failure to pay its taxes did affect Oahu in the form imagined by the majority, the bond would mitigate Oahu’s actual loss stemming from Hawaiian’s failure.5 It is quite a leap for the majority to conclude that by contracting to protect itself from Hawaiian’s failure to pay its taxes, Oahu also contracted to cover losses sustained by the taxing authorities.
As the majority correctly recognizes, I am not refuting the possibility that a contractor, in some rare cases, could be held liable for a subcontractor’s unpaid taxes, supra at 1165 n. 4. My point is simply that the parties provided for that possibility not by payment to the taxing authorities of the entire amount owed by Hawaiian, but rather by payment of the amount that would actually be owed by Oahu. That is why the subcontract requires Hawaiian to “save Oahu harmless from the payment of any and all” taxes. The parties’ intent extended no further.
Finally, as the district court noted, despite the subcontract’s provision that Hawaiian pay its taxes, its duty to do so arose not from its contractual relationship with Oahu, but rather by virtue of law. See Central Bank v. United States, 345 U.S. 639, 645-46, 73 S.Ct. 917, 97 L.Ed. 1312 (1953). The provision in the subcontract did not create Hawaiian’s tax obligation, but was merely declaratory of its existing legal duty. Md. Cas., 323 F.2d at 475; United States Fid., 201 F.2d at 119. Thus, because the duty arose not under the subcontract, but by operation of law, the fact that the bond incorporates the duties imposed by the subcontract is immaterial.
IV
Even conceding that the majority’s reading of the surety bond’s reference to the subcontract could be plausible, “[wjhere the language of a contract ‘is susceptible of two constructions, one of which makes it fair, customary and such as prudent men would naturally execute, while the other makes it inequitable, unusual, or such as reasonable men would not likely enter into, the interpretation which makes a fair, rational and probable contract must be preferred.’” Amfac, Inc. v. Waikiki Beachcomber Inv. Co., 74 Haw. 85, 839 P.2d 10, 25 (1992) (quoting Mgmt. Sys. Assoc. v. McDonnell Douglas Corp., 762 F.2d 1161, 1172 (4th Cir.1985)). Here, the majority’s interpretation is inequitable and unusual, and it certainly does not describe a contract into which reasonable men and women would likely enter.
I respectfully dissent.

. Thus, I read the bond's condition that Hawaiian "perform and complete” the subcontract as referring to Island’s obligation to complete or pay for completion of Hawaiian’s work under the subcontract in the event of a default. This does not mean completing each and every recital in the subcontract for the benefit of persons other than Oahu.
It is hard to divine a limiting principle in the majority’s approach to third-party beneficiary status. Consider, for example, that the subcontract also requires Hawaiian to "maintain a qualified and skilled Superintendent or Foreman at the site.” Article XXI. If Hawaiian fails to do so, is the individual who might have been employed in that position an intended beneficiary of the bond? Just as requiring payment of taxes, the subcontract required Hawaiian to hire a skilled Superintendent to monitor the worksite; Hawaiian’s failure to do so would be a breach of the subcontract, which, in. turn, is incorporated by the bond. Would not Island be required to pay lost wages to the person who should have been Superintendent under the majority’s theory?

. Neither 26 U.S.C. §§ 3505(a), (b) or Haw. Rev.Stat. § 235-61(a)(3)(B), which provide narrow circumstances in which third parties may be held liable for unpaid taxes, apply to this situation because Hawaiian’s unpaid taxes accrued when it had control over its payment of wages. Nor was Oahu paying those wages or supplying funds for the specific purpose of paying the employees’ wages.

. The United States and Hawaii already have a full arsenal of statutory powers to collect taxes from Hawaiian (e.g., liens and seizures). They do not need the additional firepower that the majority gives them today.

. The majority takes issue with my "economic reasoning,” supra at 1166 n. 5, but reads too much into the fact that the amounts of the bond and subcontract are equal. Certainly a subcontractor "normally calculates its charge to the contractor on the assumption that its work would be completed properly,” supra at 1166 n. 5; however, the very purpose of a surety bond is to protect a general contractor in case the work is done improperly or incompletely. Usually when that happens, the cost of repairing the unacceptable work, or hiring someone else on short notice to complete the project, is more than the original contract price. Or, as demonstrated by this case, Hawaiian surely did not budget into its subcontract price the possibility that it would owe fines and interest on unpaid taxes.

. For example, under the majority’s hypothetical, if Oahu assisted Hawaiian with the payment of wages, thus potentially making itself liable for unpaid withholding taxes under state and federal law, supra at 1166, Oahu’s remedy would be to seek the bond’s coverage for the actual amount it might have owed the taxing authorities.