Zigas v. Superior Court - 120 Cal. App. 3d 827, 174 Cal. Rptr. 806 (1981)

Rule:

Standing to sue as a third-party beneficiary to a government contract depends on the intent of the parties as manifested by the contract and the circumstances surrounding its formation. Insofar as intent to benefit a third person is important in determining his right to bring an action under a contract, it is sufficient that the promisor must have understood that the promisee had such intent. No specific manifestation by the promisor of an intent to benefit the third person is required.

Facts:

Apartment building tenants who had filed a class action against landlords of apartments financed by federally insured mortgages under the National Housing Act (12 U.S.C. § 1701 et seq.) Petitioned in the Court of Appeal for a writ of mandate to have set aside the trial court's order sustaining demurrers to the complaint with respect to 5 of the 15 causes of action alleged against the landlords by the tenants as third party beneficiaries of a contract between the landlords and the Department of Housing and Urban Develpment (HUD) that obligated the landlords not to charge more the HUD approved rent schedule. The tenants also requested that the writ order the setting aside of the trial court's order directing the tenants to strike from their complaint all references to the National Housing Act, the regulations promulgated thereunder, and the terms of the agreement between HUD and the landlords. Although the tenants' complaint had set forth a cause of action for breach of contract in which it was alleged the landlords had retained in excess of $ 2 million in violation of their agreement with HUD to charge no more than the HUD approved rent schedule, the trial court had sustained all the demurrers, apparently on the ground there was no right in the tenant to enforce the provisions of an agreement between their landlords and the federal government.

Issue:

Do beneficiaries under a contract between a federal agency and a private party have standing to sue the private party for nonperformance of the agreement as third party beneficiaries?

Answer:

Yes

Conclusion:

The Court of Appeal granted the writ and remanded for further appropriate proceedings not inconsistent with the views expressed in its opinion. Since the contract between the landlords and HUD under the National Housing Act (12 U.S.C. § 1701 et seq.) had expired, the court held the tenants' causes of action for specific performance and injunctive relief against breach of the contract had become moot; therefore it did not address the question of whether the tenants had standing to seek such remedies. It held, however, that the determination of whether beneficiaries under a contract between a federal agency and a private party have standing to sue the private party for nonperformance of the agreement as third party beneficiaries must be made in light of applicable federal statutes and other matters the court must judicially notice. It further held that under California law the tenants had standing to sue as third party beneficiaries of their landlords' contract with HUD obligating the landlords not to charge more than the HUD approved rent schedule for recovery of damages for the landlords' breach of that contract, since the contract manifested an intent to make the tenants direct beneficiaries of the landlords' promise not to charge more than the HUD approved rent schedule. It further held that there was an intent on the part of the government in executing the agreements to secure the return of any rents exacted in excess of the rent schedule, that it was the tenants rather than the government from whom the money was taken, and that therefore the money should be returned to the tenants.