Vogel v. Reed Supply Co.

• Decision Date: 14 October 1970
• Docket Number: No. 1,No. 2,No. 8,1,2,8
• Citation: 177 S.E.2d 273,277 N.C. 119
• Parties: Daniel A. VOGEL, Jr., and C. Whid Powell, Jr., Partners, t/d/b Da Pow Developers Company, a Partnership, Plaintiffs, v. REED SUPPLY COMPANY, a Corporation, Defendant, and June B. Vogel and Marilyn M. Powell, Partners, In Da Pow Developers Company, aPartnership, Da Pow Developers, Inc., Provident Mutual Life Insurance Companyof Philadelphia, and Northwestern Bank, Additional Defendants (Case). REED SUPPLY COMPANY, a Corporation, Plaintiff, v. DA POW DEVELOPERS, INC., Daniel A. Vogel, Jr., June B. Vogel, C. Whid Powelland Marilyn M. Powell, t/d/b Da Pow Developers Company, a Partnership,Provident Mutual Life Insurance Company of Philadelphia and Northwestern Bank,Defendants (Case).
• Court: North Carolina Supreme Court

Page 273

177 S.E.2d 273

277 N.C. 119

Daniel A. VOGEL, Jr., and C. Whid Powell, Jr., Partners, t/d/b Da Pow Developers Company, a Partnership, Plaintiffs, v. REED SUPPLY COMPANY, a Corporation, Defendant, and June B. Vogel and Marilyn M. Powell, Partners, In Da Pow

Developers Company, aPartnership, Da Pow Developers, Inc.,

Provident Mutual Life Insurance Companyof Philadelphia, and

Northwestern Bank, Additional Defendants (Case No. 1).

REED SUPPLY COMPANY, a Corporation, Plaintiff, v. DA POW DEVELOPERS, INC., Daniel A. Vogel, Jr., June B.

Vogel, C. Whid Powelland Marilyn M. Powell, t/d/b Da Pow

Developers Company, a Partnership,Provident Mutual Life

Insurance Company of Philadelphia and Northwestern

Bank,Defendants (CaseNo. 2).

No. 8.

Supreme Court of North Carolina.

Oct. 14, 1970.

Morgan, Byerly, Post & Keziah by William L. Johnson, Jr., High Point, for Reed Supply Co., appellant.

Fairley, Hamrick, Monteith & Cobb by James D. Monteith, Charlotte, and Newsom, Graham, Strayhorn & Hedrick by Josiah S. Murray III, Durham, for Daniel A. Vogel, Jr., and C. Whid Powell, Jr., t/a Da Pow Developers Co., a partnership, appellee.

Nye & Mitchell by R. Roy Mitchell, Durham, for Da Pow Developers, Inc., appellee.

HUSKINS, Justice.

FIRST CASE (69--CVS--41)

Unless the landowner (Da Pow Developers Company) is a third-party beneficiary of the subcontract between the general contractor (Da Pow Developers, Inc.) and the subcontractor (Reed Supply Company), an action by the landowner against the subcontractor for breach of the subcontract cannot be maintained, and Reed's motion for summary judgment in the first case (69--CVS--41) must be allowed. Rule 56, Rules of Civil Procedure. 'If the contract was not made for the benefit of the third party, he has no cause of action upon the contract to enforce it, or sue for its breach. Traders' Land Co. v. Abbott Realty Co., 207 N.C. 453, 177 S.E. 335.' American Trust Co. v. Catawba Sales & Processing Co., 242 N.C. 370, 379, 88 S.E.2d 233, 239 (1955).

The practice of allowing third-party beneficiaries not in privity of contract to bring an action in their own name to enforce the contract made for their benefit was recognized in North Carolina as early as 1842. Cox v. Skeen, 24 N.C. 220 (2 Ired.L.), 38 Am.Dec. 691. The leading case, however, is Lawrence v. Fox, 20 N.Y. 268 (1859), where it is stated that 'the law operating on the act of the parties creates a duty, establishes a privity, and implies the promise and obligation on which the action is founded.'

The fiction of an implied privity has been abandoned in more recent times, but there has been no substantial agreement on the precise theoretical basis with which privity is replaced. See Note, Third Party Beneficiaries and the Intention Standard: A Search For Rational Contract Decision-Making, 54 Va.L.Rev. 1166 (1968); Note, The Third Party Beneficiary Concept: A Proposal, 57 Colum.L.Rev. 406 (1957). Nevertheless, there is general agreement that a third party may enforce a contract to which he was not privy but which was made for his benefit. See Annotation, Right of Third Person to Enforce Contract Between Others For His Benefit, 81 A.L.R. 1271.

The American Law Institute's Restatement of Contracts provides a convenient framework for analysis. Third party beneficiaries are divided into three groups: Donee beneficiaries, where it appears that the 'purpose of the promisee in obtaining the promise of all or part of the performance thereof is to make a gift to the beneficiary'; Creditor beneficiaries, where 'no purpose to make a gift appears' and 'performance of the promise will satisfy an actual or supposed or asserted duty of the promisee to the beneficiary'; and Incidental beneficiaries, where the facts do not appear to support inclusion in either of the above categories. Restatement of Contracts § 133 (1932). While duties owed to donee beneficiaries and creditor beneficiaries are enforceable by them, Restatement of Contracts §§ 135, 136, a promise of incidental benefit does not have the same effect. 'An incidental beneficiary acquires by virtue of the promise no right against the promisor or the promisee.' Restatement of Contracts § 147.

The commentators have adopted the analytical framework of the Restatement, and many courts have followed suit. 4 Corbin on Contracts § 774; Simpson on Contracts § 116; 2 Williston on Contracts (Jaeger, 3rd Edition) § 356; Fidelity and Casualty Co. of New York v. Plumbing Department Store, 117 Fla. 119, 157 So. 506 (1934); La Mourea v. Rhude, 209 Minn. 53, 295 N.W. 304 (1941); Borough of Brooklawn v. Brooklawn Housing Corp., 124 N.J.L. 73, 11 A.2d 83 (1940); Kelly v. Richards, 95 Utah 560, 83 P.2d 731, 129 A.L.R. 164 (1938); Mackubin v. Curtiss-Wright Corp., 190 Md. 52, 57 A.2d 318 (1948); Pettus v. Olga Coal Co., 137 W.Va. 492, 72 S.E.2d 881 (1952); Ridder v. Blethen, 24 Wash.2d 552, 166 P.2d 834 (1946).

While North Carolina has never explicitly adopted the analytical framework of the Restatement, the principles applicable to incidental beneficiaries were noted in Chipley v. Morrell, 228 N.C. 240, 45 S.E.2d 129 (1947), and American Trust Co. v. Catawba Sales & Processing Co., supra (242 N.C. 370, 88 S.E.2d 233). Even so, the law in this State as to Direct third party beneficiaries is synonymous with the Restatement categories of donee and creditor beneficiaries. American Trust Co. v. Catawba Sales & Processing Co., supra. Restatement § 133 correctly states the law of this State and we therefore expressly approve the Restatement formula.

Plaintiff landowner relies on Brown v. Bowers Construction Co., 236 N.C. 462, 73 S.E.2d 147 (1952); Gaither Corp. v. Skinner, 238 N.C. 254, 77 S.E.2d 659 (1953); and Quenby Corp. v. Frank H. Conner Co., 272 N.C. 208, 158 S.E.2d 18 (1967). The Gaither and Quenby decisions were based on the law as to joinder of parties, and therefore are not authoritative for the proposition for which they are cited. Any support for plaintiff's position contained therein is merely Obiter dictum. The Brown case, moreover, concerned a non-delegable duty assumed by contract and imposed by operation of law which defendant Construction Company sought unsuccessfully to escape by assignment to a subcontractor. That case is not authoritative on the question before us.

Defendant Reed Supply Company, on the other hand, relies on American Trust Co. v. Catawba Sales & Processing Co., supra (242 N.C. 370, 88 S.E.2d 233) and Board of Education v. Deitrick, 221 N.C. 38, 18 S.E.2d 704 (1942), as well as the Restatement of Contracts. The Trust Company case supports the proposition that a third person may sue to enforce a binding contract made for his direct benefit but not where the benefit to him is only incidental. In Deitrick, the general contractor attempted to join the materialman as codefendant in a suit by the landowner against the contractor for breach of contract. Since there was no privity between plaintiff landowner and the materialman, the motion for joinder was properly denied. All cases from other jurisdictions cited by Reed concern privity, and privity is not relevant to the determination of third party beneficiary problems in North Carolina American Trust Co. v. Catawba Sales & Processing Co., supra.

We must therefore analyze the facts to determine whether plaintiff landowner is a creditor beneficiary or merely an incidental beneficiary. The intention of the parties to the subcontract is of paramount importance. 'As a general proposition, the determining factor as to the rights of a third party beneficiary is the intention of the parties who actually made the contract. The real test is said to be whether the contracting parties intended that a third person should receive a benefit which might be enforced in the courts.' 17 Am.Jur.2d, Contracts § 304. It is not sufficient that the contract does benefit him if in fact it was not intended for his direct benefit. Robins Dry Dock and Repair Co. v. Flint, 275 U.S. 303, 48 S.Ct. 134, 72 L.Ed. 290 (1927).

In our view the subcontract here was not intended for the benefit of the plaintiff landowner. Plaintiff benefits only incidentally or indirectly because performance of the subcontract was rendered in fulfillment of Reed's obligation to the general contractor. Hence, any benefit derived from the subcontract by the landowner would necessarily accrue indirectly, I.e., through the general contractor.

The Restatement itself contemplates that an owner in a construction contract be classified as a mere incidental beneficiary of the contract between the general contractor and the subcontractor; thus it provides that an owner would acquire 'no right against the promisor or the promisee' in consequence thereof. Restatement of Contracts § 147, Illustration 1. The performance of the subcontractor is not given or received in discharge of the obligation of the general contractor to the owner, but rather in discharge of the subcontractor's own obligations to the general contractor.

Moreover, the text writers support this view. 'A subcontractor, bound to the principal contractor to install the plumbing in C's proposed building, is not liable for breach to C, the owner. The promised performance is here to be rendered to the principal contractor.' Simpson on Contracts § 116 at page 246. Accord, 4 Corbin on Contracts § 779D.

We therefore hold that plaintiff landowner in Case No. 69--CVS--41 is a mere incidental beneficiary of the construction subcontract between Reed and the general contractor. As such he cannot maintain against Reed a claim for damages for breach of the subcontract. It therefore follows as a matter of law that Reed's motion for summary judgment in Case No. 69--CVS--41 should have been allowed. Rule 56, Rules of Civil Procedure.

SECOND CASE (69--CVS--46)

It is conceded that neither the general contractor (Da Pow Developers, Inc.) nor the subcontractor (Reed Supply Company) were licensed as a general contractor pursuant...