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Governments —local, state and federal — make an untold number of contracts every day, most (if not all) of which are meant to benefit the citizens for whose welfare governments are generally thought to be responsible. When a private landowner contracts to build a new hotel on his property, the owner of the restaurant next door may be benefited; but the benefit, no matter how large, is unintended — it is no part of the landowner's purpose to confer a benefit on his neighbor and we have little difficulty classifying the restaurant owner as an "incidental" beneficiary in the terminology of the Restatements. Government contracts are different: when it makes a contract to purchase sewage treatment services or to provide financing for a housing development, the government is exchanging its resources for something, or the promise of something, that is meant to benefit its citizens. The citizens who will use the sewage system and who will live in the housing development are, in the most obvious sense, "intended" beneficiaries of the government contracts made on their behalf. But if we permitted all of the intended beneficiaries of every such agreement to enforce its terms, the promisor would become contractually obligated to a limitless number of third parties. Courts have traditionally been reluctant to permit such a broadening of contractual responsibility unless, in Cardozo's words, the benefit conferred on the public by the contract is "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 benefit is lost."2
The Restatement First reflected a similar uneasiness about government contracts. Section 145 provided that "a promisor bound to the United States or to a state or municipality" has no contractual obligations to the public unless "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 injuries resulting from the breach of his contract. Restatement Second §313(2) asserts, somewhat more cautiously, that a promisor who contracts with the government is not contractually liable to the public for consequential damages unless3
(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.
Despite such scholarly hesitation, the courts have in recent years shown an increased (though by no means universal) willingness to use the "progressive" third party beneficiary idea as a vehicle for expanding the legal rights of citizens in what Professor Charles Reich has called the "new property" — the diverse and all — embracing field of government benefits on which each of us increasingly depends. The following materials, which cover a period of more than fifty years, provide some milestones to measure our progress (or decline) in this regard, and illustrate the role that the third party beneficiary idea has played in the re-emergence of a status-based law of obligations.
June 02, 2014
Kessler, Gilmore & Kronman
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