4-2 decision finds no recourse under contract
Employees of a company that had a contract with the city of Minneapolis and who allege they were paid less than the contract required have no recourse because they were not intended third-party beneficiaries of the contract, the Minnesota Supreme Court has ruled.
The Supreme Court also rejected claims under Minn. Stat. sec. 181.13, the Payment of Wages Act, and under a theory of unjust enrichment.
The 4-2 decision, Caldas v. Affordable Granite & Stone Inc., affirmed the Hennepin County District Court and the Court of Appeals. Justice Alan Page dissented, joined by Justice Paul Anderson. Justice Christopher Dietzen wrote for the majority.
“We conclude that appellants have failed to show that recognition of intended third-party beneficiary rights is appropriate to effectuate the intention of the parties to the contract. The promise of AGS to properly classify work in accordance with U.S. Department of Labor criteria and to pay the prevailing wage to employees was a general promise to comply with the law, which does not confer upon AGS employees the right to enforce the law,” Dietzen wrote.
Minneapolis attorney Justin Cummins, who represented the employees, voiced his frustration. “Four justices voted to affirm even though the amicus State of Minnesota said we were right about the state statute at issue, the City of Minneapolis said we were right about the city’s contract and ordinance, and the business associations said we were right about the law and policies governing the contracting regime.
“This decision is unfortunate not only for the 13 plaintiffs but for the rule of law.”
Deputy City Attorney Peter Ginder said that under any prevailing age statute or ordinance the workers are intended beneficiaries. He said the city would have to consider whether it needs to rewrite its contracts.
But St. Paul attorney Paula Vraa, who represented the respondent, countered, “The court did a very careful job of analyzing who can enforce a contract and took the view that the parties are the only ones who can enforce. The third-party beneficiary doctrine has to be limited to very specific circumstances, otherwise you end up with what happened here. The city did investigate, which they were allowed to do under the contract and the ordinance, and told the respondent they were properly paying the employees.”
Payment of prevailing wage
In 2007, after issuing a request for proposals, the city hired the respondent to repair and restore terrazzo flooring and other parts of the Minneapolis Convention Center. Respondent’s proposal included a certificate stating that employees would be paid the prevailing wage for their class of employee. Their proposal stated they would hire 10 floor technicians and three foremen for the project.
The respondent later determined that the employee’s classification was janitorial and their wage should be $16.28 per hour. Several unions complained to the city that the employees should be classified as terrazzo mechanics and paid the prevailing wage of $44.31 per hour. The city investigated the matter but did not take action.
The appellants sued for breach of contract, alleged violations of the Payment of Wages Act, alleged violations of the Minnesota Fair Labor Standards Act and unjust enrichment. They argued that they were the intended third-party beneficiaries of the contract between the city and the respondent and that the respondents breached the contract by its classification and wage rate for the appellants. They also argued that the respondent was in violation of the state statutes and unjustly enriched by its failure to pay them as terrazzo mechanics.
Hennepin County Attorney Michael Freeman, who appeared as amicus curiae, said the majority fails to understand the policy behind the prevailing wages laws. The law is intended to protect the public by making sure government workers are skilled enough for their jobs, and then that they are paid properly, he said.
Restatement states, what is appropriate?
The court relied on the Restatement (Second) of Contracts sec. 302, as it has in other cases, to determine whether a beneficiary of a promise is an intended beneficiary with legal rights under a contract or an incidental beneficiary with no legal rights. (See section 302, at right.)
The appellants argued that the city intended to benefit them under section 302, subpart (1)(b). But the court looked to the objective showing of intent through the language of the contract and found no intent to benefit the appellants.
First, there was no enforcement remedy in the contract, the court said. Normally, courts are wary of private enforcement of government contracts and thus require a showing that the parties clearly intended that third parties be permitted to enforce the contract, Dietzen wrote. But the contract at issue gave only the city the right of enforcement, and the city determined that there had not been a violation, the court said.
The court was unconvinced by the amicus City of Minneapolis’ assertion that it intended to give the appellants the benefit of the contract and therefore they should be treated as intended beneficiaries of the contract. It would rely only on the objective manifestation of intent that appeared in the contract and not the subjective intent of the parties.
What wage payment act requires
The court turned next to claims brought under Minn. Stat. secs. 181.01-171, the Payment of Wages Act. The act does not create a substantive right to recovery of a particular wage, the court said, but is a timing statute that requires prompt payment of wages earned. “To recover under the statute the employee must establish an independent, substantive legal right, separate and distinct from section 181.13, to the particular wage claimed,” the court said.
The appellants did not establish that right, Dietzen continued. “Because we conclude appellants are not intended third-party beneficiaries under the contract, they are not entitled to enforce the contract … against AGS. Appellants therefore have not ‘actually earned’ the higher prevailing wage within the meaning of section 181.13(a). Consequently, appellants have failed to establish a separate substantive legal right to recover wages that is separate and distinct from section 181.13, and therefore appellants’ statutory claim fails.”
Unjust enrichment limited
The doctrine of unjust enrichment was also unavailable to the appellants, the court concluded. “[The doctrine] does not apply when there is an enforceable contract that is applicable … We have limited the application of unjust enrichment to claims premised on an implied or quasi-contract between the claimant and the party alleged to be unjustly enriched,” the court said.
The court concluded that because the appellants are not intended third-party beneficiaries of the contract, their unjust enrichment claim is not legally supportable. “Essentially, appellants are attempting to bring an unjust enrichment claim to avoid the result that they lack third-party beneficiary status to enforce the contract. (Cite omitted.) Previously, we have not extended the theory of unjust enrichment to allow an incidental third-party beneficiary to enforce a contract, and we decline to do so in this case. Accordingly, we hold that appellants’ unjust enrichment claim fails as a matter of law,” Dietzen said.
Cummins responded, “The dissent makes it clear that this is exactly the kind of case where unjust enrichment claims should be available.”
Minneapolis attorney Jesse R. Orman, who represented several builder’s associations appearing as amici, agreed.
“When can equity step in if not when a contract does not apply and there is a alleged law violation. The reason the amici supported the petitioner is because of the potential impact on how projects are bid. Contractors who intend not to pay prevailing wage will be able to bid projects at lower cost and obtain awards over contractors who properly bid under the assumption that they are going to comply with the prevailing wage laws,” he said.
This is not an appropriate unjust enrichment case, countered Vraa. “Unjust enrichment is being alleged more and more and used in situations where it’s not intended to be used. This isn’t the type of case where it would be proper,” she said. Vraa said an example of a proper case is where the parties attempt to make a contract and it fails, but one party performed and should be compensated.
For whose benefit?
The dissenting justices argued that the appellants were intended third-party beneficiaries of the respondents’ contract with the city.
“If Affordable Granite & Stone’s promise to pay its employees the prevailing wage for their work on the Convention Center was not meant to benefit these appellants, for whose benefit was it intended?” Page asked.
Continuing, Page conceded that the contract is silent as to employees’ rights to enforce the prevailing wage provision. “[I]f the contract specifically gave these appellants the right to enforce Affordable Granite & Stone’s obligation to pay its employees the prevailing wage, they would not need the third-party beneficiary doctrine,” the dissent noted.
The dissent also disputed the majority’s conclusion on the doctrine of unjust enrichment. “Limiting recovery for unjust enrichment to third-party contract beneficiaries, and barring recovery for unjust enrichment by those who are no more than incidental beneficiaries of a contract, simply negates the claim altogether,” Page wrote.
The dissent said the case should be remanded for trial to resolve several genuine issues of material fact.
Restatement (Second) of Contracts, Section 302e
(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate 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 beneficiary; or
(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.
(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.