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© 2011 School of Government. e University of North Carolina at Chapel Hill
NO. 126 | DECEMBER 2011LOCAL GOVERNMENT LAW BULLETIN
Third-Party Beneciaries of Contracts
Entered into by Local Governments
David M. Lawrence
Normally someone who is not a party to a contract has no standing to enforce or challenge the
validity of the contract, nor any right to seek damages for its breach. Occasionally, however,
courts recognize and enforce nonparty rights in a contract, as third-party beneciaries. is
Local Government Law Bulletin explores the application of third-party beneciary rules to
contracts entered into by local governments in North Carolina. e bulletin begins by reviewing
the general rules for determining whether third parties are intended beneciaries of contracts,
both as to contracts generally and as to contracts in which at least one party is a governmental
entity. It next considers third-party rights in contracts between local governments and pri-
vate persons or entities. e bulletin concludes by considering third-party rights in contracts
between local governments (that is, interlocal contracts). A recurrent point made in the discus-
sion is that whether there are third-party rights in a contract is a matter of the intention of the
actual parties to the contract. For that reason, local governments should consider making the
rights of third parties in the contract an explicit part of the negotiation process and then of the
contract itself. is can mean either armatively providing for such rights or explicitly exclud-
ing them. As noted in the bulletin, a local government’s position on this issue may depend upon
the type of contract involved and, particularly, the extent to which the contract is intended to
provide direct benets to particular customers rather than services to the unit at large.
Third-Party Rights under a Contract Generally
Whether someone is a third-party beneciary of a contract is very much a matter of fact—the
intentions of the actual parties to the contract. If the parties’ intentions are not clear from the
contract itself, however, it is up to a court to determine those intentions from whatever lan-
guage is in the contract and by any relevant circumstances that surrounded the negotiation and
execution of the contract.
1
In undertaking that task, courts have relied to a considerable extent
David M. Lawrence is a School of Government faculty member specializing in local government law.
1. In Vogel v. Reed Supply Co., 277 N.C. 119, 128, 177 S.E.2d 273, 279 (1970), the court wrote that
the “intention of the parties to the [contract] is of paramount importance”; and in Raritan River Steel
Co.v. Cheery, Bekaert& Holland, 329 N.C. 646, 652, 407 S.E.2d 178, 182 (1991), the court added that the
“Court, in determining the parties’ intentions, should consider circumstances surrounding the transac-
tion as well as the actual language of the contract.”
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© 2011 School of Government. e University of North Carolina at Chapel Hill
upon the summary of third-party beneciary law set out in the rst and second Restatement of
Contracts.
e rst Restatement divided possible third-party beneciaries into three groups—donee
beneciaries, creditor beneciaries, and incidental beneciaries—and gave enforcement rights
under a contract to the rst two groups but not the third.
2
e Restatement’s usage of “donee
beneciaries” and “creditor beneciaries” was widely followed, and in 1970 the North Carolina
Supreme Court stated that it “expressly approve[d] the Restatement formula.”
3
When the Restatement (Second) was approved in 1981, the terms donee beneciary and credi-
tor beneciary were dropped because they “carr[ied] overtones of obsolete doctrinal diculties”
and instead were combined into a single category—intended beneciary. e current Restate-
ment principles are set out in Section302, which reads as follows:
§ 302. Intended and Incidental Beneciaries
(1) Unless otherwise agreed between promisor and promisee, a beneciary of a promise is an
intended beneciary if recognition of a right to performance in the beneciary is appropriate to
eectuate 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 beneciary; or
(b) the circumstances indicate that the promisee intends to give the beneciary the benet
of the promised performance.
(2) An incidental beneciary is a beneciary who is not an intended beneciary.
4
2. Section 133 of the Restatement of Contracts read as follows:
(1) Where performance of a promise in a contract will benet a person other than
thepromisee, that person is, except as stated in Subsection(3):
(a) a donee beneciary if it appears from the terms of the promise in view of the
accompanying circumstances 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 bene-
ciary or to confer upon him a right against the promisor to some performance nei-
ther due nor supposed or asserted to be due from the promisee to the beneciary;
(b) a creditor beneciary if no purpose to make a gift appears from the terms of the
promise in view of the accompanying circumstances and performance of the
promise will satisfy an actual or supposed or asserted duty of the promisee to
the beneciary, or a right of the beneciary against the promisee which has been
barred by the statute of Limitations or by a discharge in bankruptcy, or which is
unenforceable because of the Statute of Frauds;
(c) an incidental beneciary if neither the facts stated in Clause(a) nor those stated in
Clause(b) exist.
(2) Such a promise as is described in Subsection(1a) is a gift promise. Such a promise as
is described in Subsection(1b) is a promise to discharge the promisee’s duty.
(3) Where it appears from the terms of the promise in view of the accompanying cir-
cumstances that the purpose of the promisee is to benet a beneciary under a trust
and the promise is to render performance to the trustee, the trustee, and not the bene-
ciary under the trust, is a beneciary within the meaning of this Section.
3. Vogel, 277 N.C. at 128, 177 S.E.2d at 278.
4. e comments to this section indicate that the “donee” and “creditor” usage is not entirely dead.
Commentb species that the “type of beneciary covered by Subsection(1)(a) is often referred to as a
‘creditor beneciary’” and species that Subsection(1)(b) involves “gift promises” and that the “bene-
ciary of such a promise is often referred to as a ‘donee beneciary.’”
Third-Party Beneciaries of Contracts Entered into by Local Governments 3
© 2011 School of Government. e University of North Carolina at Chapel Hill
e North Carolina Supreme Court subsequently made clear that it would use the analytic
approach of the Restatement (Second) in determining whether a person could enforce or chal-
lenge a contract to which that person was not a party.
5
It should be reiterated, however, that it is the intention of the parties to the contract that is
paramount. e formulas in the two Restatements are intended to help a court determine that
contractual intent when the contract itself is not explicit. If the contract is explicit, recourse to
the Restatement formulas is unnecessary.
6
Both Restatements included a separate statement concerning certain contracts in which at
least one of the parties is a governmental entity. e more recent statement is found in Sec-
tion313 of the Restatement (Second):
§ 313. Government Contracts
(1) The rules stated in this Chapter apply to contracts with a government or governmental agency
except to the extent that application would contravene the policy of the law authorizing the contract
or prescribing remedies for its breach.
(2) In particular, a promisor who contracts with a government or governmental agency to do an
act for or render a service to the public is not subject to contractual liability to a member of the public
for consequential damages resulting from performance or failure to perform unless
(a) the terms of the promise provide for such liability; or
(b) the promisee is subject to liability to the member of the public for the damages and a
direct action against the promisor is consistent with the terms of the contract and with
the policy of the law authorizing the contract and prescribing remedies for its breach.
7
Note that this section of the Restatement (Second) applies only to contracts under which a
party contracts with a government to “do an act for or render a service to the public.” Examples
of this sort of contract include agreements to provide water or sewer service to a government’s
citizens, to collect solid waste within a government, to enforce the building code on behalf
of a government, to provide re protection to a geographic area of a government, and so on.
Contracts of this kind create a unique sort of analytic problem. Because governments exist to
5. Raritan, 329 N.C. at 651, 407 S.E.2d at 181 (citing Snyderv. Freeman, 300 N.C. 204, 221, 266 S.E.2d
593, 604 (1980)).
6. See Broadway Maint. Corp.v. Rutgers, 447 A.2d 906, 909 (1982): “Whether the third person is a
creditor or donee of the contractual promisee is relevant only in ascertaining the intent of the contract-
ing parties. e parties of course may expressly negate any legally enforceable right in a third party.
Likewise they may expressly provide for that right. When the contract is silent, it is necessary to examine
the pertinent provisions in the agreement and the surrounding circumstances to ascertain that intent.”
7. e comparable statement in original Restatement of Contracts was found in Section145 and read
as follows:
A promisor bound to the United States or to a State or municipality by contract to do
an act or render a service to some or all of the members of the public, is subject to no
duty under the contract to such members to give compensation for the injurious conse-
quences of performing or attempting to perform it, or of failing to do so, unless,
(a) an intention is manifested in the contract, as interpreted in the light of the
circumstances surrounding its formation, that the promisor shall compensate
members of the public for such injurious consequences, or
(b) the promisor’s contract is with a municipality to render services the non-
performance of which would subject the municipality to a duty to pay damages to
those injured thereby.
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© 2011 School of Government. e University of North Carolina at Chapel Hill
serve the public, in a sense all these contracts are intended to benet the members of the pub-
lic. Does that therefore mean that all members of the public are intended beneciaries of the
contracts? Both Restatements generally answer this question in the negative. As can be seen
above, Section313 of Restatement (Second) states that such contracts are subject to the general
rules stated in Section302 and, importantly, that members of the public are not automatically
intended beneciaries of such contracts and therefore do not have third-party rights to chal-
lenge or enforce the contracts or to receive damages for their breach.
It is not clear, though, that North Carolina’s appellate courts subscribe to this section of the
Restatement. One of the illustrations given in the comment to this section of the Restatement
conicts with North Carolina case law. Here is the illustration:
B, a water company, contracts withA, a municipality, to maintain a certain
pressure of water at the hydrants on the streets of the municipality. Aowes no
duty to the public to maintain that pressure. e house ofC, an inhabitant of
the municipality, is destroyed by re, owing toB’s failure to maintain the agreed
pressure. Bis under no contractual duty toC.
North Carolina is one of a small number of states that have permitted the owner of property
damaged or destroyed because of inadequate hydrant pressure to bring a third-party beneciary
claim against a water provider who has a contract with the city under which the provider agrees
to provide adequate pressure for re protection. e rst case in a series of such North Carolina
cases is Gorrellv. Greensboro Water-Supply Co.,
8
in which the franchise agreement between the
city and the water company included detailed specications about the water pressure that was
required for re hydrants. e plainti’s commercial property was destroyed by re, allegedly
as a direct result of the water company failing to meet those contractual specications, and it
sued the water company as a third-party beneciary to the franchise contract. e trial court
overruled the company’s demurrer to the complaint, and the North Carolina Supreme Court
armed, writing:
It is true, the plainti is neither a party nor privy to the contract, but it is impos-
sible to read the same without seeing that, in warp and woof, in thread and
lling, the object is the comfort, ease, and security from the re of the people,
the citizens of Greensboro. is is alleged by the eleventh paragraph of the
complaint, and is admitted by the demurrer. e benet to the nominal con-
tracting party, the city of Greensboro, as a corporation, is small in comparison,
and, taken alone, would never have justied the grants, concessions, privileges,
benets, and payments made to the water company. Upon the face of the con-
tract, the principal beneciaries of the contract in contemplation of both parties
thereto were the water company on the one hand and the individual citizens of
Greensboro on the other. e citizens were to pay the taxes to fulll the money
consideration named, and furnishing the individual citizens with adequate sup-
ply of water, and the protection of their property from re, was the largest duty
assumed by the company.
9
8. 124 N.C. 328, 32 S.E. 720 (1899).
9. Id. at 333, 32 S.E. at 721.
Third-Party Beneciaries of Contracts Entered into by Local Governments 5
© 2011 School of Government. e University of North Carolina at Chapel Hill
Gorrell has been explicitly conrmed in a number of later cases, most recently in Potterv. Caro-
lina Water Co.,
10
which involved essentially identical facts.
After Potter, however, several judges on the court placed a limiting interpretation on Gorrell
and seemed to move closer to the Restatement (Second)’s position on governmental contracts. In
Matternesv. City of Winston-Salem, the city had entered into a contract with the State Highway
Commission, under which the city agreed to maintain state highways within the city.
11
Under
the contract the state had to approve any contract entered into by the city for highway main-
tenance and the city’s annual obligations were limited by the amount of money made avail-
able each year by the state; in addition, under state policy such a contract was not intended to
transfer to the city the state’s liability for failing to maintain highways. On a snowy morning the
plainti’s mother was killed when her car skidded on Interstate 40 as it passed through the city,
and the plainti, as her mother’s executor, claimed to be a third-party beneciary of the main-
tenance contract, which she alleged that the city had breached. e trial court entered a nonsuit
against plainti, and the North Carolina Supreme Court armed.
e plainti relied specically upon Gorrell, but in its plurality opinion the court rst cited
and quoted from a New York case that had reached the opposite conclusion from Gorrell and
then moved on to distinguish Gorrell and limit it to a relatively narrow set of facts. e New
York case was Moch Co.v. Rensselaer Water Co., and the opinion was by Benjamin Cardozo,
then chief judge of the New York Court of Appeals.
12
e facts of Moch were quite similar to
those of Gorrell, but the New York court held that the property owner was not a third-party
beneciary to the water supply contract. e Matternes court included this quotation from the
New York case, which reects the policy choices of the Restatement (Second):
In a broad sense it is true that every city contract, not improvident or wasteful,
is for the benet of the public. More than this, however, must be shown to give a
right of action to a member of the public not formally a party. e benet, as it
is sometimes said, must be one that is not merely incidental and secondary. ...
It must be primary and immediate in such a sense and to such a degree as to
bespeak the assumption of a duty to make reparation directly to the individual
members of the public if the benet is lost. e eld of obligation would be
expanded beyond reasonable limits if less than this were to be demanded as a
condition of liability. A promisor undertakes to supply fuel for heating a public
building. He is not liable for breach of contract to a visitor who nds the build-
ing without fuel, and thus contracts a cold. e list of illustrations can be inde-
nitely extended. e carrier of the mails under contract with the government is
not answerable to the merchant who has lost the benet of a bargain through
negligent delay.
13
e opinion in Matternes went on to distinguish Gorrell by noting that it involved a utility fran-
chise contract and stating that “[o]ne accepting and operating under such a franchise assumes
10. 253 N.C. 112, 116 S.E.2d 374 (1960). e Potter court reviewed the entire series of earlier cases.
11. 286 N.C. 1, 209 S.E.2d 481 (1974).
12. 159 N.E. 896 (N.Y. 1928).
13. 286 N.C. at 13, 209 S.E.2d at 488.
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duties and incurs obligations more extensive than those incurred by the promisor in an ordinary
contract.”
14
It is not clear, though, that Matternes brought North Carolina squarely within the law on
governmental contracts as set out in Restatement (Second). Only six justices heard the case,
and the main opinion was joined by only three of the six; thus it spoke for only a plurality of
the sitting justices. One justice dissented, protesting against what he characterized as “in eect,
overrul[ing]” Gorrell, arguing that “the Gorrell rule is the better reasoned one even though
followed by a minority of jurisdictions.”
15
A second justice concurred in the result but with-
out opinion, while the nal sitting justice concurred in the outcome on statutory grounds but
rejected the main opinion’s treatment of the third-party beneciary issue.
16
us, despite the
quoted language from the dissent, only three of six justices clearly supported the opinion’s treat-
ment of third-party beneciaries under government contracts, including the limiting of Gorrell.
us, the status of Gorrell and that case’s approach to third-party beneciaries of government
contracts is not settled.
Many governmental contracts, probably most, are not of the sort addressed by Section313. In
this larger group of contracts—construction contracts, professional services contracts, property
transactions, etc.—the contract does not involve acts for or services to the public, as set out in
the examples above, but rather acts for or services to the government itself. For these sorts of
contracts the basic rules of Section302 apply, without reference to Section313.
17
Governmental Contracts in North Carolina: Contracts with Private Parties
In many instances a government entering into a contract, particularly a contract with a private
person or entity, may be indierent to whether the contract creates rights in third parties. In
most contracts with private persons or entities the government is the promisee, the party for
whom some service is being performed or to whom some product is being delivered. e gov-
ernment’s obligation under the contract is simply to pay for the performance or the delivery. It
is the other party to the contract who is the promisor. And it is the promisor, not the promisee,
who might face a lawsuit from an outsider claiming to be a third-party beneciary under the
14. Id. at 14, 209 S.E.2d at 488.
15. Id. at 22, 209 S.E.2d at 493 (Huskins, J., dissenting).
16. Justice Higgins concurred without opinion. Justice Sharp concurred but wrote:
From that portion of the majority opinion which discusses the rights of third party
beneciaries to a contract to maintain an action for its breach, I must disassociate
myself. I do not agree that members of the traveling public are merely “incidental
beneciaries” of the contract which the City made with the Board. Further, it is not my
intention to overrule or question Gorrellv. Water Supply Co. I adhere to the rule of law
enunciated in that case, which is deeply embedded in our jurisprudence.
Id. at 16, 209 S.E.2d at 490 (citations omitted).
17. One large category of contracts entered into by local governments is those for the purchase of
goods. With the exception of product liability actions, there are relatively few cases nationally that
involve third-party claims under such purchase contracts. With respect to product liability, the North
Carolina courts historically have required privity of contract in order to bring a product liability action,
but that strict rule has become shakier; see Bernickv. Jurden, 306 N.C. 435, 293 S.E.2d 405 (1982). Pas-
sage of the Products Liability statute, Section 99B-2 of the North Carolina General Statutes (G.S.), has
further considerably weakened the rule.
Third-Party Beneciaries of Contracts Entered into by Local Governments 7
© 2011 School of Government. e University of North Carolina at Chapel Hill
contract.
18
erefore the government might conclude that third-party rights are a concern only
for the promisor and leave it to that party to raise the issue in the contract negotiations. Of
course, if the issue is raised, the government will have to decide if it really is indierent to third-
party rights under the contract and negotiate accordingly.
In some instances, though, a government may not be indierent to the possible existence of
third-party rights. First, the government’s obligations under a contract might go beyond simply
paying for the other party’s performance. ere might be mutual promises of performance. For
example, in a contract to extend a water system or sewer system, the government may contrac-
tually promise to obtain and make available the easements necessary to run the utility lines. If
the extension is to serve a specic community, the government might be concerned that prop-
erty owners in that community could claim to be third-party beneciaries of the contract. Sec-
ond, sometimes a government will contract with another, for the other party to fulll some sort
of responsibility of the government; and the government might prefer that any litigation engen-
dered by the contractor’s failure to fulll the responsibility be against the contractor rather than
the government. In one case, for example, a local government construction contract required
the government to prepare, or cause to be prepared, an environmental impact statement for the
construction project. When the government met this requirement by entering into a separate
requirement with a consulting engineer, the issue arose of whether the construction contractor
could sue the engineer, as a third-party beneciary of the consulting contract, because of the
engineer’s delay in preparing the report.
19
ird, performance of the contract by the other party,
even if not negligent, might cause damage for which a damaged party might seek recompense
from the government. For example, construction of a utility system might cause the earth-
supporting abutting structures to collapse, even if the contractor is without negligence, and
abutting property owners might seek compensation from the government. e government may
wish to transfer that possible liability to the contractor constructing the utility system, identify-
ing abutting property owners as third-party beneciaries under the contract with a right to seek
their compensation from the contractor rather than the government.
20
Fourth, even if it is clear
18. See, e.g., District of Columbiav. Campbell, 580 A.2d 1295 (D.C. 1990). In this case, a subcontractor
performed work on a public works project for a general contractor who had failed to obtain the payment
bond required by statute and contract. e subcontractor claimed to be a third-party beneciary of the
contract between the District and the general contractor and sued both under the contract. e D.C.
Court of Appeals held that even if the subcontractor was a third-party beneciary under the contract,
he could sue only the general contractor, as promisor, and not the District, as promisee. Accord, Broad-
way Maint. Corp.v. Rutgers, 447 A.2d 906 (N.J. 1982), in which the New Jersey Supreme Court held that
because prime contractors in a university construction project were third-party beneciaries of contract
between the university and the general contractor, prime contractors could sue only the general contrac-
tor and not the university. But see Andersonv. Rexroad, 266 P.2d 320 (Kan. 1954), in which the Kansas
Supreme Court held that a property owner whose property was destroyed during a street improvement
project was a third-party beneciary of the construction contract and could sue either the city or the
contractor.
19. Coac, Inc.v. Kennedy Eng’rs, 136 Cal. Rptr. 890 (Cal. Ct. App. 1977) (construction contractor was
creditor beneciary under the consulting contract).
20. Examples of cases in which abutters who had been harmed by construction projects were held to
be third-party beneciaries of construction contracts include Plantation Pipe Linev. 3-D Excavators, Inc.,
287 S.E.2d 102 (Ga. Ct. App. 1981) (damage to pipeline next to construction site), Batorv. Ford Motor Co.,
257 N.W. 906 (Mich. 1934) (damage to building because of settlement during water tunnel construction),
and LaMoureav. Phude, 295 N.W. 304 (Minn. 1940) (damage to abutting property caused by blasting).
Many of these construction contracts include provisions that the contractor often claims is an indem-
nity clause, which can only be enforced by the government as indemnitee. See, e.g., Simonsv. Tri-State
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that the government is simply a promisee under the contract, and it is clear there is no govern-
ment liability if the contract is not performed, the contract may benet a limited group of per-
sons or property owners and the government may wish to entitle them to enforce the contract’s
obligations. If nothing else, allowing these third-party beneciaries to enforce the contract may
relieve the government of the burden of doing so. For example, a number of cases from other
states have involved developer promises to the government to construct subdivision improve-
ments, and the courts have recognized property owners within the subdivision as third-party
beneciaries of the promises and therefore allowed them to enforce the contract’s obligations
against the developer.
21
If the government does have an interest in specifying whether or not third parties may be
beneciaries under a contract, the best course is to make third-party rights an issue in the nego-
tiation of the contract and then to specically spell out the results of that negotiation in the nal
contract.
Governmental Contracts in North Carolina: Contracts with Other Governments
When one local government contracts with another, at least one of them will be a promisor and
therefore potentially susceptible to a third-party claim. In addition, many such contracts involve
services to the public or some portion of the public. A county might provide law enforcement
services for a small town or enforce the building code on behalf of a town. A city might provide
recreational programs for residents of the unincorporated area, provide a building to house
a library operated by the county, or treat the sewage generated by the collection system of a
nearby town. ese are the sorts of contracts that are the focus of Section313 of the Restate-
ment (Second). Under Section313, a member of the public would usually not be considered a
third-party beneciary of this sort of contract, but recall that it is currently unclear whether the
North Carolina appellate courts accept the Restatement’s approach on this issue. (ere are no
North Carolina cases involving third-party beneciaries under contracts between two local gov-
ernments.) Bearing that uncertainty in mind, it might be useful to review the cases from other
states to gain a sense of their approach and their application of the Restatement principles.
Cases in which the asserted third-party beneciary represents the entire public of one of the
contracting governments. When the third-party plainti claims to be a beneciary of a contract
because he or she is a member of the entire public served by the promisee government, the
courts have rejected the claim. All of the third-party beneciary cases from other states arising
from contracts between two local governments have involved the provision of utility services; in
several of these cases, one government agrees to provide service that benets the entire public
Const. Co., 655 P.2d 703 (Wash. Ct. App. 1982). If a North Carolina provision is an indemnity clause of
this sort, it does not run afoul of the prohibition on indemnication clauses in construction contracts in
G.S.22B-1, which does not apply to a clause in which partyA agrees to indemnify partyB for claims aris-
ing out of partyA’s negligence.
21. E.g., Villa Sierra Condo. Ass’nv. Field Corp., 878 P.2d 161 (Colo. App. 1994) (condominium associa-
tion, along with one unit owner, held to be third-party beneciaries of contract between condominium
developer and city under which developer agreed to construct certain street improvements); Vale Dean
Canyon Homeowners Ass’nv. Dean, 785 P.2d 772 (Or. App. 1990) (homeowners within development held
to be third-party beneciaries of contract between developer and county under which developer agreed
to construct certain street improvements).
Third-Party Beneciaries of Contracts Entered into by Local Governments 9
© 2011 School of Government. e University of North Carolina at Chapel Hill
of the second government. In each such case, an attempt by a member of that broad beneted
public to claim third-party beneciary status under the contract has failed. Following are sum-
maries of these cases.
Gallov. Division of Water Pollution Control.
22
In the 1930s, the Metropolitan District Com-
mission entered into contracts with a number of central Massachusetts cities, under which the
commission agreed to construct sewer lines, one of the cities agreed to treat the sewage col-
lected through those lines, and the other cities agreed to maintain the lines. Eventually there
was so much inltration and inow into the lines that the Division of Water Pollution Control
prohibited several cities from accepting new connections to the lines, and as a result the plainti
developers were unable to build their housing developments. ey sued the commission, the cit-
ies, and the division for damages, arguing that the failure of the cities to maintain the lines, and
of the commission to make them comply with their contractual obligations, was a breach of the
1930s contracts and that the developers were third-party beneciaries under those contracts.
Most of the Massachusetts supreme court’s opinion concerned whether the plaintis had
standing under the 1930s legislation that authorized the agreements. at legislation allowed
suits by “interested persons” to enforce the obligations under the acts, and plaintis claimed
that they were interested. Reviewing the legislation, the court determined that the legislative
purpose was to protect nearby water supplies, through construction of a sewer system, rather
than to provide sewer services to properties. erefore the plaintis were not interested persons.
at being the case, the court proceeded to hold that the plaintis were also not intended ben-
eciaries of the contracts and therefore could not claim third-party beneciary status.
Bodine v. Osage County Rural Water District No.7.
23
e water district purchased water from
a nearby city under a forty-year contract executed in 1972. e contract set out the original
price that the district would pay for the water and the circumstances under which the city could
raise the price. In the years after the contract was rst entered into, the city raised prices several
times and the district passed these increases onto its customers. e plainti was a customer of
the district who believed that the district was paying more for the water than was justied by
the contract terms and therefore brought suit seeking various forms of relief.
e plainti rst argued that the district was under a duty, enforceable by any customer, to
enforce the contract and seek overcharges from the city, even though neither the city nor the
district argued that the contract has been misapplied. e Kansas Supreme Court held that a
customer is without standing to force one local government that is party to an agreement with
another to interpret the contract in the same way as the customer. Having reached that conclu-
sion, the court held that a utility customer was not an intended beneciary of a contract under
which the utility purchases water.
South Texas Water Authorityv. Lomas.
24
e South Texas Water Authority (STWA) con-
structed a water transmission line from the city of Corpus Christi to provide water to municipal
and industrial customers in an area of south Texas. In 1981 it entered into a contract with the
city of Kingsville for that purpose. is action was brought by Lomas, an individual citizen of
Kingsville, and by a nonprot association titled Citizens for Water Acquired through Equal
Rates (WATER), alleging that the rates charged under the contract were excessive and unreason-
able and led to the citizens and customers of Kingsville paying a disproportionate share of the
22. 372 N.E.2d 1258 (Mass. 1978).
23. 949 P.2d 1104 (Kan. 1997).
24. 223 S.W.3d 304 (Tex. 2007).
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STWA operating costs. e action was brought against STWA, as supplier of the water; the city
of Kingsville was not joined as a defendant.
Both plaintis claimed standing as third-party beneciaries under the contract; in addition
they claimed standing as customers and ratepayers of the city of Kingsville. e trial court held
that they had no standing under either theory, but the court of appeals reversed. In an opinion
found at 223 S.W.3d 389 (2005), it granted Lomas standing as a ratepayer to pursue monetary
and declaratory relief and WATER standing as a ratepayer to pursue declaratory relief; both
plaintis were granted standing as third-party beneciaries of the water supply contract.
e Texas Supreme Court reversed, nding no language in the contract that demonstrated
any intention of the parties to confer a benet upon the residents of the city or its utility cus-
tomers, and, indeed, neither had the court of appeals. Rather, the lower court relied on a state-
ment of purpose in the enabling legislation under which the water authority operated, which
stated that the authority existed “for the benet of the people of this state and for the improve-
ment of their properties and industries.” e supreme court rejected this argument as proving
too much:
It is true that the Legislature, in creating STWA as a conservation and reclama-
tion district, intended generally to benet the people of this state, as presumably
it intends with all legislation. But general benecence does not create third-party
rights, else every Texan could challenge or seek to enforce any government
contract and the presumption against third-party-beneciary agreements would
disappear. e enabling statute upon which the court of appeals relied created
no more than an incidental benet to the public at large, the very type of benet
we have said is insucient to confer third-party-beneciary status.
25
A similar case, with a similar outcome, though not involving a contract between two govern-
ments, is Fifth ird Bankv. Cope, a 2005 decision of the Ohio Court of Appeals.
26
e plainti
was the unfortunate purchaser of a new home constructed upon the closed landll of a roong
company. Within a year or so of the home’s construction it had literally sunk into the ground
and fallen apart, and as a consequence it was condemned. e plainti, and her mortgagee bank,
sued the developer of the subdivision, the builder of the home, the city which had been respon-
sible for building code inspections of the home, and the consulting engineer who had actually
made the inspections. is last defendant had had a contract with the city, under which the
25. Id. at 307.
Other cases of interest, though not all involving contracts between two local governments, include
Federated Conservationists of Westchester County, Inc.v. City of Yonkers, 117 F.Supp.2d 371 (S.D.N.Y.
2000) (county and city entered into interlocal agreement under which county relinquished reversionary
interest in parkland conveyed some years earlier to city and city agreed to locate twenty-ve acres of new
park space to replace that park; court holds that park users, who sought to block conversion of parkland
to low-income housing, are not third-party beneciaries of agreement); Mireev. U.S., 249 S.E.2d 573 (Ga.
1978) (survivors of airplane passengers, who sought damages resulting from plane crash, held not to be
third-party beneciaries of airport development contract between county and Federal Aviation Adminis-
tration); Uhlv. City of Sioux City, 490 N.W. 69 (Iowa Ct. App. 1992) (property owner who sought damages
for lack of access to property because of state highway project held not to be third-party beneciary to
contract between state and city under which city agreed to construct replacement road that would have
provided the desired access).
26. 835 N.E.2d 779 (Ohio Ct. App. 2005).
Third-Party Beneciaries of Contracts Entered into by Local Governments 11
© 2011 School of Government. e University of North Carolina at Chapel Hill
engineer agreed to do all building inspections for the city, and the plainti homeowner claimed
that she was a third-party beneciary of that contract. (e case is relevant to North Carolina
interlocal agreements because many counties have contracted to do building inspections within
smaller municipalities.)
Following the lead of Section313 of the Restatement (Second), the court rejected the third-
party claim. It held that the engineer had been hired to provide services to the community at
large and not to specied home buyers and that membership in the community at large was
inadequate to be an intended beneciary of the contract.
Cases in which the asserted third-party beneciary represents a subset of the entire public of
one of the contracting governments. A smaller number of cases involve plaintis who come from
subsets of less than the entire public of the promisee government, when the subset is established
in the contract itself. e outcomes of these cases are more mixed. Again the cases involve the
provision of utility services, but in two of the cases the plaintis were found to be third-party
beneciaries of the interlocal agreements. Let’s begin with those two cases.
e rst case is Touchberryv. City of Florence, a 1988 decision of the South Carolina Supreme
Court.
27
e city had entered into an agreement with the county to provide water and sewer ser-
vices to a municipal services area comprising unincorporated territory adjacent to the city. e
plainti owned property within this services area and requested water and sewer from the city.
e city refused to extend these services, however, unless the plainti agreed to city annexation
of the property, and the plainti brought suit, claiming that the city’s requirement was a breach
of the contract with the county and that he was a third-party beneciary of the contract. With-
out much analysis in the opinion, the court agreed with the plainti: the city’s obligations under
the contract were inconsistent with its annexation requirement, and the parties intended that
property owners in the area be able to enforce the contract. In a later case, the South Carolina
court allowed a third party to litigate the meaning of another interlocal utility agreement but
held that the contract in question allowed the city to condition utility service upon annexation.
28
e second case is McAlmont Suburban Sewer Improvement District No. 242v. McCain-Hwy.
161, LLC, a 2007 case from an Arkansas appellate court.
29
e sewer committee of North Little
Rock entered into an agreement with the sewer improvement district under which the city
agreed to treat sewage generated within the district. e contract included the following provi-
sion regarding sewer service through district lines to nonresidents of the district:
e District shall have the right to make charges for connections to the
District’s trunk sewer lines by residents living outside the boundaries of the
District, provided that such residents and the Committee have entered into an
agreement with regard to services to be rendered to such residents by the Com-
mittee or the Committee has otherwise approved such charges.
e LLC owned property outside the district and wanted sewer service. When the district set
forth its connection charges for such service, the LLC approached the city and was given a
considerably lower price. When the district refused to make the connection at the city’s price,
the LLC brought this action and prevailed at the trial court. In arming, the court held that the
plainti was a member of a special class and therefore a third-party beneciary of the contract:
27. 367 S.E.2d 149 (S.C. 1988).
28. Robarge v. City of Greenville (S.C.), 675 S.E.2d 788 (2009).
29. 262 S.W.3d 185 (Ark. Ct. App. 2007).
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e District and the Committee made their agreement about sewer services
approximately fteen years before McCain was even formed. And the District/
Committee agreement does not name McCain or say that it was intended to
benet non-parties. e agreement, however, suciently described a class of
which McCain is a member—non-residents of the District whom the District
and the Committee were willing to serve. e opportunity for sewer service
arises out of this agreement and benets that class of non-residents. is benet
is more than incidental; sewer services are an essential of modern urban life.
e District was willing to serve McCain, and indeed has done so on an interim
basis before and during this litigation. McCain sought no damages. It sought
only an injunction requiring the District to accept the connection fee set by the
Committee. Considering all these circumstances, we hold that McCain was a
beneciary of the non-resident provision of the District/Committee agreement
and thus had standing to litigate which entity had the power to set the connec-
tion fee under that agreement.
30
e court concluded by holding that the contractual clause quoted above gave complete discre-
tion to the sewer committee to set the connection fees for nonresidents.
In the South Carolina case, the third-party beneciary was a resident of an area of less than
the entire county, which was the focus of the contract, and in the Arkansas case the third-party
beneciary was a nonresident of the sewer district under a contract that made special provision
for connections by nonresidents. But not all the cases involving such smaller classes of claimed
beneciaries have found these classes to be intended beneciaries of the contracts. Following are
discussions of three competing cases.
Dateline Builders, Inc. v. City of Santa Rosa.
31
e city and county had entered into a con-
tract under which the city would be sole supplier of sewer services to a dened area outside the
city. e parties’ intention was to avoid a proliferation of small sewer systems in this area. e
contract specically provided that any development in the area had to conform to development
plans adopted jointly by the city and county.
Dateline sought to connect a new housing development to the city’s system, but the city
refused, alleging that the development was not in conformity to the development plan. e plan
called for development to be compact and close to the city, and Dateline’s site leapfrogged sub-
stantial undeveloped territory. When the development failed, Dateline brought suit against the
city, claiming to be a third-party beneciary of the city–county contract. e California court of
appeals armed the trial court’s judgment for the city, holding that the intention of the parties
was to avoid proliferation of sewer systems rather than to extend sewer services to all parts of
the service area. ere was to be benet to the general public of the service area, not to specic
property owners.
OFW Corp. v. City of Columbia.
32
In 1992, the city and a sewer district entered into a con-
tract under which the district would close its existing sewer treatment plant and transmit
its collected sewage to an existing city plant via a new trunk line to be built pursuant to the
agreement. One provision of the contract required the district to obtain city permission to
30. Id. at 187.
31. 194 Cal. Rptr. 258 (Cal. Ct. App. 1983).
32. 893 S.W.2d 876 (Mo. Ct. App. 1995).
Third-Party Beneciaries of Contracts Entered into by Local Governments 13
© 2011 School of Government. e University of North Carolina at Chapel Hill
extend its sewer system beyond the existing service area, which the city agreed not to withhold
unreasonably.
OFW wanted to develop a subdivision adjacent to the existing service area and asked the
district to obtain city permission to do so. e city at rst attempted to condition approval upon
the developer’s acceptance of annexation but later backed down. It subsequently gave approval
but conditioned it upon the developer’s following city development standards in the subdivision.
OFW refused and brought suit. It claimed to be a third-party beneciary under the contract and
argued that the city was in breach by refusing to permit connection of OFW’s property to the
existing system.
e Missouri Court of Appeals approached the case through the structure of the original
Restatement, dierentiating between creditor, donee, and incidental beneciaries. OFW claimed
to be a creditor beneciary, but the court disagreed. First, it could nd no duty of the district to
serve plainti’s property with sewer. Nor could it nd any language in the contract itself show-
ing an intent by the parties to specically benet property owners near the service area. e
contract was basically an agreement for the benet of the two contracting parties.
Page v. City of Conyers.
33
For almost thirty years the city and the county operated under
an agreement under which the city was given exclusive authority to operate water and sewer
systems in the unincorporated areas of the county. When the agreement ended, this action was
brought by ratepayers in the unincorporated area, alleging that the city violated the agreement
over its nal ve years and overcharged customers. ey sought more than $10million in dam-
ages. e appellate court armed a dismissal by the trial court, nding no basis in the agree-
ment for holding that there was a primary intention to benet utility customers. e plaintis’
main argument was based on language in the agreement about serving the public, but the court
determined that this was nowhere near specic enough to cause the customers to be considered
intended beneciaries.
Conclusion
Because of the uncertain character of the North Carolina case law on the issue of whether a
member of the public might be a third-party beneciary of a contract with a local government,
we cannot be sure whether the state’s appellate courts would follow the lead of the cases set
out above involving beneciaries who represent the entire public of the contracting govern-
ment. Nor can we judge which path the North Carolina courts might follow when the claimed
beneciaries represent a class of less than the entire public of the contracting government. is
uncertainty, plus the fact that courts in at least two states have found certain citizens to be
third-party beneciaries of interlocal agreements involving utility services, suggests that gov-
ernments entering into many sorts of contracts—whether with another government or with a
private contractor—should consider the possibility of attempted third-party enforcement of
the contracts and whether the government is indierent to the possibility or not. If a govern-
ment is not willing to leave resolution of this issue to a court, it should recall that the existence
or nonexistence of third-party rights is rst and foremost a matter of the intention of the actual
parties to the contract. e parties can make it clear, in the contract itself, whether or not there
is a class of nonparties who are intended to be beneciaries under the contract. It should often,
33. 499 S.E.2d 126 (Ga. Ct. App. 1998).
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therefore, be a regular feature of government contract negotiations to consider the possibility
of third-party beneciaries, to negotiate a mutual position on such beneciaries, and then to
include the outcome of those negotiations in the written contract.
34
34. A successful example of contract language denying rights to third parties is found in Mission
Oaksv. County of Santa Barbara, 77 Cal.Rptr.2d 1 (Cal. Ct. App. 1998). e county had contracted with
an engineering rm for the latter to prepare an environmental impact report on a proposed development.
Because of the report, the county rejected the development, and the developer then brought suit for
breach of contract, claiming to be a third-party beneciary of the contract between the county and the
engineer. e court rejected the claim, relying on the express language of the contract:
[T]he nal responsibility and nal authority on all questions concerning the content
and quality of the EIR lies in the sole discretion of the County.... Consultant under-
stands and agrees that its responsibility to provide a complete and accurate EIR is owed
solely to County and that its accountability under this Contract shall likewise be solely
to County and not to Applicant or to any other third-person or entity.
Id. at 7.
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