5.3 Standing
The Restatement (Second) of Contracts (1981) provides the starting point for considering the viability of any third party beneficiary cause of action./441/ Section 302 defines all beneficiaries of a contract as being intended or incidental. Only an intended beneficiary has standing to enforce a contract between two other parties. Whether a person is an intended beneficiary with the resulting right to sue depends upon the intention of the parties to the contract. That intent may be articulated in the contract itself, or discerned or imputed from the statutory context that prompted the contract to be executed./442/
Courts have also found intent to benefit a third party when one of the contracting parties owes the third party a pre-existing duty. This “duty owed” interpretation is drawn from the language of Section 302(1)(a) of the Restatement and is a variation on the payment of money (“creditor beneficiary”) principle articulated there. Consequently, in an action under a contract that has been executed in conjunction with a government benefit program, the complaint should allege that the recipient is the intended beneficiary of the contract between the state and the private entity because the state had a pre-existing duty to provide coverage to the recipient. /443/
When examining the issue of intent, it is important to distinguish between implied congressional intent to create a cause of action and the implied intent of the parties to a contract to benefit a third party. This distinction is clearly articulated in Brogdon v. National Healthcare Corporation, which recognized that if the privatization contract itself evinces an intent to make a third party an intended beneficiary, the contract can be enforced, even if it was executed pursuant to a statute that does not itself contain an implied right to sue./444/ At the same time, the fact that Congress has enacted a program at all will sometimes be perceived as evidence of intent that the ensuing contract benefit the third parties eligible for the government program in question, whether or not the contract itself articulates that intent./445/
Some contracts between the government and a private entity specifically state that the contract is not intended to create rights in third parties. While Section 302 of the Restatement implies that the parties may contract away a third party beneficiary’s right to enforce the contract, none of the examples presented there address contracts entered into for the purpose of implementing or administering statutory benefit programs. In that context, some courts have allowed such provisions to defeat third party beneficiary claims, while others have refused to do so./446/
III.B. Choice of Forum and Law
Contracts of the sort discussed here are usually entered into in furtherance of the goals of a federal benefit program. The federal courts have struggled somewhat with the issue of whether suits seeking to enforce such contracts fall within federal question jurisdiction of the federal courts. The answer may depend on the nature of the federal program at issue. Courts are much more likely to find jurisdiction in subsidized housing cases, in which HUD is often a defendant, and less so in actions concerning programs involving federal-state cost sharing./447/ Often, however, third party beneficiary claims will be joined with causes of action brought directly under the substantive federal statute, such as the Food Stamp Act, or under Section 1983, which will vest the court with federal question jurisdiction. In such cases, the court may entertain the contract claim pursuant to the supplemental jurisdiction provisions of 28 U.S.C. § 1367.
A related issue is whether a court should apply the state or federal common law of contracts. In the context of subsidized housing, courts have usually applied federal common law because of the perceived value of having a uniform nationwide housing policy./448/ However, because the statutes creating federal-state cost sharing programs like Medicaid, TANF, and State Children’s Health Insurance Program (SCHIP) permit state-by-state variation both in their administration and in the nature of the benefits offered, courts in cases involving those programs are more likely to find it appropriate to apply the common law of the state.
III.C. Available Relief
A final consideration in third party beneficiary contract actions is the nature and scope of the relief available./449/ The Restatement addresses the issue of injunctive relief in Sections 357, 365 and 366. While the language of contract law varies somewhat from that of statutory litigation, the Restatement makes clear that both negative and mandatory injunctions (in the form of “forbearance”) are authorized as relief in third party beneficiary actions. Indeed, litigators familiar with the requirements for obtaining statutory injunctions will find that virtually the same considerations apply in these contract actions.
While Edelman v. Jordan/450/ and its progeny prohibit a federal court from awarding damages against a state agency that has violated a benefit recipient’s rights, no such bar normally exists against private entities that have contracted with the state. In Section 313, the Restatement addresses the availability of damages in third party beneficiary actions. While the Restatement does not generally support damages to “a member of the public” for breach of a government contract, that rule is not absolute. This rule’s applicability probably depends on whether the plaintiff is merely a member of the public at large, or, rather, a member of a recognizable subset of the public, such as a tenant of a particular development or a recipient of a particular public benefit. In the latter situation, the Restatement seems to support, and certainly does not foreclose, an appropriate award of damages./451/
441. Assuming that the court would not apply federal common law, the advocate will have to determine whether applicable state law adopts the Restatement. If not, further research is necessary to determine the applicable legal standard.
442. One court has suggested that if Section 8 tenants are not the intended beneficiaries of a contract between HUD and a private landlord, then “the legitimacy of the multi-billion dollar Section 8 program is placed in grave doubt.” Holbrook v. Pitt, 643 F.2d 1261, 1271 (7th Cir. 1981). A similar conclusion was reached in the Medicaid context. Smith v. Chattanooga Med. Investors, Inc., 62 S.W.3d 178 (Tenn. Ct. App. 2001). Thus, the fact that one of the parties to the contract, although not the one being sued, is a government entity, certainly does not foreclose an enforcement action against the private entity, and may in some circumstances even facilitate it.
443. See Hitov & Deford, supra note 440, at 592, n.7.
444. Brogdon v. Nat’l Healthcare Corp., 103 F. Supp. 2d 1322, 1334 (N.D. Ga. 2000).
445. Holbrook, 643 F.2d at 1271.
446. See Hitov & Deford, supra note 440, at 593-94.
447. See id. at 595, and Penobscot Nation v. Ga.-Pac. Corp., 254 F.3d 317, 321 (1st Cir. 2001), for a more complete discussion of the considerations relevant to making this determination. See also Audio Odyssey, Ltd. v. United States, 255 F.3d 512, 520-521 (8th Cir. 2001). The Supreme Court has addressed this issue on occasion, without establishing a bright line test. Compare O’Bannon v. Town Court Nursing Ctr., 471 U.S. 773, 784 n. 17 (1980) (suggesting such claims are ones of state law) with Grable & Sons Metal Prods. v. Darue Eng’g & Mfg., 125 S. Ct. 2363 (2005) (finding federal jurisdiction where an important federal concern is imbedded in a state law claim).
448. See, e.g., Miree v. DeKalb County, 433 U.S. 25, 30 (1977); Price v. Pierce, 823 F.2d 1114, 1120 (7th Cir. 1987). But see Guity v. Martinez, No. 03 Civ. 6266 (LAP), 2004 U.S. Dist. LEXIS 9158, 2004 WL 1145832 (S.D.N.Y. May 20, 2004) and Johnson v. City of Detroit, 319 F. Supp. 2d 756 (E.D. Mich. 2004), both finding the issue to be one of state law.
449. For a fuller discussion of this issue, see Hitov & Deford, supra note 440, at 595-97.
450. Edelman v. Jordan, 415 U.S. 651 (1974).
451.Nonetheless, some courts have taken a narrower view than that of the Restatement regarding the availability of damages under such contracts. See, e.g., Mair v. City of Albany, 303 F. Supp. 2d 237, 246 (N.D.N.Y. 2004), relying in part upon Guardians Ass'n v. Civil Serv. Comm'n of City of N.Y., 463 U.S. 582, 603 n.24 (1983).
Updated 2006