Koenig v. City of South Haven

597 N.W.2d 99, 460 Mich. 667

• Court: Michigan Supreme Court
• Decided: July 20, 1999
• Docket: 109555, Calendar No. 10
• Status: Published

Opinions

Taylor, J.

This matter arises out of the near-drowning of plaintiffs’ daughter when a large wave swept her off a pier in the city of South Haven. Plaintiffs pursued a breach of contract claim against the city under a third-party beneficiary theory. They contended that South Haven breached its obligations under a memorandum of understanding with the Army Corps of Engineers to restrict access to the piers in inclement weather. We conclude that plaintiffs’ daughter was not an intended third-party beneficiary of the memorandum of understanding. Accordingly, we would reverse the Court of Appeals decision that reversed the trial court’s grant of summary disposition for South Haven.

FACTS AND PROCEEDINGS

On May 10, 1990, “senior skip day,” plaintiffs’ daughter, Jennifer Koenig, and five other high school seniors went to the North Pier in South Haven on Lake Michigan. The weather was drizzling, cold, and windy. A large wave swept Koenig and two others (Jeanine Bauman and Dan Caswell) off the pier and into the water. Bauman was rescued by two men. Caswell drowned. Two police officers attempted to rescue plaintiffs’ daughter, but were unsuccessful; a United States Coast Guard tug boat eventually rescued her. She suffered anoxic (deprivation of oxygen) brain damage from the incident and became totally dependent, requiring twenty-four hour a day care thereafter. She died while the present case was pending before the Court of Appeals.

It is undisputed that the piers are owned and were erected by the Army Corps of Engineers. In January 1972, South Haven and the Detroit District Corps of Engineers entered into a memorandum of understanding. It stated in pertinent part:

I. Purpose:

This Memorandum of Understanding establishes general guidelines concerning the furnishing of assistance by the City of South Haven in regulating the use of Federal Navigation structures within the City of South Haven, Michigan, during periods of inclement weather or when danger to persons or property exists, as authorized herein.

H. Authority:

The government hereby gives the City of South Haven the right to enter upon Federal Navigational Structures for the purpose of regulation [of] public use of same.

III. Responsibilities:

A. The Corps of Engineers will furnish and install fence type barricades, with gates at the shore end of Federal pier structures, where required.

B. The City of South Haven, Michigan has been granted responsibility for coordinating and controlling entrance to existing Federal navigational structures at the South Haven Harbor, during period[s] of inclement weather.

C. The responsibility for determining when gates erected on Federal structures are to be opened and closed, rest[s] with the City of South Haven, Michigan.

V. Federal Pier Regulations:

The public shall be restricted from the North and South Federal piers in the City of South Haven during periods of inclement weather and when great danger to persons or property exists, said times to be determined by the City Manager, or a person designated by him. Gates will be locked during each emergency and reopened immediately thereafter.

In an October 6, 1972, letter, the corps provided keys to the fence and gate structures it had recently completed and stated:

We appreciate the cooperation you have expressed in the operation of these safety features on an annual basis, including their placement, removal, and storage.

As the reason the structures are removed is to avoid damage by the winter ice, they need to be removed only for that period. However, we ask that they be removed no earlier than Labor Day and placed no later than Memorial Day.

On the day of the incident, South Haven had not yet placed the fence and gate structures for the summer season.

Plaintiffs filed a two-count complaint. They sued South Haven for breach of contract, alleging that the memorandum of understanding (mou) was a contract that required South Haven to preclude access to the piers under dangerous conditions. They contended that their daughter was an intended third-party beneficiary of the mou and that she had suffered damages from South Haven’s breach of its duties under this contract. Plaintiffs also sued individual defendants under the gross negligence exception to governmental immunity established in MCL 691.1407; MSA 3.996(107).

Defendants moved for summary disposition under MCR 2.116(C)(7), (8), and (10). The trial court granted South Haven’s motion, finding that plaintiffs’ daughter was not an intended third-party beneficiary of the MOU. It stated that it need not decide whether the MOU was a contract. It concluded that South Haven merely undertook responsibility for managing the operation of the fence under the mou; thus, the corps and South Haven made promises to each other in the MOU, not promises to every person who visits the piers. The trial court denied the motion for summary disposition with respect to the individual defendants, concluding that whether they engaged in gross negligence was an issue for the jury.¹ Pursuant to the jury’s verdict, the trial court issued a judgment of no cause of action in favor of the individual defendants.

Both parties appealed in the Court of Appeals, which reversed the grant of summary disposition for South Haven on the breach of contract claim and affirmed the jury verdict on the gross negligence claim. 221 Mich App 711; 562 NW2d 509 (1997). In its opinion, the Court noted that the third-party beneficiary statute does not restrict potential third-party beneficiaries to limited groups and concluded that the law does not prohibit a class consisting of “virtually any member of the public who used the government pier during times of inclement weather” from being intended third-party beneficiaries of the mou. Id. at 719. It also found that the clear intention of the MOU was to “protect the safety of individuals who would attempt to use the pier during times of dangerous weather.” Id. at 719. This led it to conclude that plaintiffs’ daughter was an intended third-party beneficiary of the MOU and that the trial court accordingly erred in granting summary disposition for South Haven on this count. Finally, it found that genuine factual issues remained regarding whether South Haven received consideration under the mou to the extent that the mou could constitute a contract. Id. at 722. Thus, it remanded this matter for trial of the breach of contract count. Regarding the gross negligence count against the individual defendants, the Court affirmed the jury’s verdict and further agreed with South Haven’s contention that the gross negligence count was barred by the “public duty doctrine.”² Id. at 729. This Court granted leave to determine whether South Haven was entitled to summary disposition of plaintiffs’ breach of contract claim. 458 Mich 865 (1998).

STANDARD OF REVIEW

This issue arose in the context of a summary disposition motion made pursuant to MCR 2.116(C)(8) and (10). This Court reviews rulings on summary disposition motions de novo. Spiek v Dep’t of Transportation, 456 Mich 331, 337; 572 NW2d 201 (1998).

MCR 2.116(C)(8) tests the legal sufficiency of the claim on the pleadings alone to determine whether the plaintiff has stated a claim on which relief may be granted. The motion must be granted if no factual development could justify the plaintiff’s claim for relief. [Id.]

In reviewing a motion for summary disposition brought under MCR 2.116(C)(10), a trial court considers affidavits, pleadings, depositions, admissions, and documentary evidence filed in the action or submitted by the parties, MCR 2.116(G)(5), in the light most favorable to the party opposing the motion. A trial court may grant a motion for summary disposition under MCR 2.116(C)(10) if the affidavits or other documentary evidence show that there is no genuine issue in respect to any material fact, and the moving party is entitled to judgment as a matter of law. MCR 2.116(C)(10), (G)(4).

In presenting a motion for summary disposition, the moving party has the initial burden of supporting its position by affidavits, depositions, admissions, or other documentary evidence. The burden then shifts to the opposing party to establish that a genuine issue of disputed fact exists. Where the burden of proof at trial on a dispositive issue rests on a nonmoving party, the nonmoving party may not rely on mere allegations or denials in pleadings, but must go beyond the pleadings to set forth specific facts showing that a genuine issue of material fact exists. If the opposing party fails to present documentary evidence establishing the existence of a material factual dispute, the motion is properly granted. [Quinto v Cross & Peters Co, 451 Mich 358, 362-363; 547 NW2d 314 (1996) (citations omitted).]

DISCUSSION

We begin with two preliminary observations. First, governmental entities such as South Haven axe generally immune from tort liability. MCL 691.1407; MSA 3.996(107). However, governmental immunity does not extend to contract actions, even when the contract action arises out of the same facts that would support a tort action. Ross v Consumers Power Co (On Rehearing), 420 Mich 567, 647; 363 NW2d 641 (1984). Accordingly, governmental immunity does not bar plaintiffs’ breach of contract claim against South Haven.

Second, in order to succeed in their breach of contract claim, plaintiffs ordinarily would initially have to demonstrate that the mou is, in fact, a valid contract. The trial court’s conclusion that plaintiffs’ daughter was not an intended third-party beneficiary of the MOU made it unnecessary for the trial court to decide whether the MOU was a contract. The Court of Appeals did not decide this issue either; it remanded the matter for trial of plaintiffs’ breach of contract count, including whether the mou was a contract. Our analysis, set forth below, convinces us that plaintiffs’ daughter was not an intended third-party beneficiary of the MOU. Therefore, like the trial court, we need not decide whether the mou is a contract. Moreover, for puiposes of analyzing whether she was an intended third-party beneficiary of the MOU, we will simply assume, arguendo, that the MOU is a contract.

MCL 600.1405; MSA 27A.1405 governs the ability of third-party beneficiaries to enforce contracts. It states in pertinent part:

Any person for whose benefit a promise is made by way of contract, as hereinafter defined, has the same right to enforce said promise that he would have had if the said promise had been made directly to him as the promisee.

(1) A promise shall be construed to have been made for the benefit of a person whenever the promisor of said promise had undertaken to give or to do or refrain from doing something directly to or for said person.

Recognizing that a promise may be undertaken directly for a designated class of persons, rather than a person specifically named in the contract, subsection 1405(2)(b) adds:

If such person is not in being or ascertainable at the time the promise becomes legally binding on the promisor then his rights shall become vested the moment he comes into being or becomes ascertainable if the promise has not been discharged by agreement between the promisor and the promisee in the meantime.

In describing the conditions under which a contractual promise is to be construed as for the benefit of a third party to the contract in § 1405, the Legislature utilized the modifier “directly.” Simply stated, section 1405 does not empower just any person who benefits from a contract to enforce it. Rather, it states that a person is a third-party beneficiary of a contract only when the promisor undertakes an obligation “directly” to or for the person. This language indicates the Legislature’s intent to assure that contracting parties are clearly aware that the scope of their contractual undertakings encompasses a third party, directly referred to in the contract, before the third party is able to enforce the contract. Subsection 1405(2) (b)’s recognition that a contract may create a class of third-party beneficiaries that includes a person not yet in being or ascertainable precludes an overly restrictive construction of subsection 1405(1). That is, it precludes a construction that would require precision that is impossible in some circumstances, such as would be the case if there were a requirement in all cases that a third-party beneficiary be referenced by proper name in the contract. This is simply to say that the Legislature, in drafting these two provisions, apparently wanted to strike a balance between an impossible level of specificity and no specificity at all. This means that there must be limits on the use of subsection 1405(2) (b) to broaden the interpretation of subsection 1405(1) because otherwise the result is to remove all meaning from the Legislature’s use of the modifier “directly.” We are led to this analysis because a court’s duty is to give meaning to all sections of a statute and to avoid, if at all possible, nullifying one by an overly broad interpretation of another. See Hoste v Shanty Creek Management, Inc, 459 Mich 561; 592 NW2d 360 (1999). It is our duty then in applying this statute to our facts to comply with this rule.³

Initially, it must be noted that there is a temptation to blur the distinction between direct and incidental beneficiaries because, as this case demonstrates, the claims of putative third-party beneficiaries are often compelling. Yet the Legislature, apparently apprehensive about creating a disincentive to contract because of the fear of unanticipated third-party claims, chose to change the law with great caution. It is appropriate that we, as Michigan courts before us, respect this cautious approach.

Decisions of this Court interpreting the third-party beneficiary statute are in harmony with this guarded approach that attempts to be properly permissive in defining persons in a class (subsection 1405[2]) without obliterating the statute’s safeguards by disregarding the requirement that an obligation be undertaken directly for a third party’s benefit (subsection 1405[1]). This careful approach can be seen in Greenlees v Owen Ames Kimball Co, 340 Mich 670, 676; 66 NW2d 227 (1954), where this Court, in setting the stage for its analysis of our third-party beneficiary statute, quoted with approval 12 Am Jur, Contracts, § 282, p 834:

“The principle that one not a party or privy to a contract but who is the beneficiary thereof is entitled to maintain an action for its breach is not so far extended as to give to a third person who is only indirectly and incidentally benefited by the contract the right to sue upon it. An incidental beneficiary has no rights under the contract. A third person cannot maintain an action upon a simple contract merely because he would receive a benefit from its performance or because he is injured by the breach thereof. Where the contract is primarily for the benefit of the parties thereto, the mere fact that a third person would be incidentally benefited does not give him a right to sue for its breach.”

The import of this discussion is that as a general matter, even as it is with our statute, only intended third-party beneficiaries, not incidental beneficiaries, may enforce a contract under § 1405. Similarly, consistent with our specific rule (subsection 1405[2][b]), this Court has adopted the persuasive rule that a third-party beneficiary “may be one of a class of persons, if the class is sufficiently described or designated.” Guardian Depositors Corp v Brown, 290 Mich 433, 438; 287 NW 798 (1939), citing Burton v Larkin, 36 Kan 246; 13 P 398 (1887) (emphasis added). That is, a third-party beneficiary may be a member of a class, but the class must be sufficiently described. This follows ineluctably from subsection 1405(l)’s requirement that an obligation be undertaken directly for a person to confer third-party beneficiary status. As can be seen then, this of course means that the class must be something less than the entire universe, e.g., “the public”; otherwise, subsection 1405(2)(b) would rob subsection 1405(1) of any narrowing effect. The rationale would appear to be that a contracting party can only be held to have knowingly undertaken an obligation directly for the benefit of a class of persons if the class is reasonably identified. Further, in undertaking this analysis, an objective standard is to be used to determine from the contract itself whether the promisor undertook “to give or to do or to refrain from doing something directly to or for” the putative third-party beneficiary. Guardian Depositors at 437 (emphasis added). See also Kammer Asphalt Paving Co, Inc v East China Twp Schools, 443 Mich 176, 189; 504 NW2d 635 (1993).

An objective assessment of the mou demonstrates that, rather than undertaking an obligation for the benefit of a putative third-party beneficiary, it allocates responsibilities between South Haven and the coips regarding restricting access to the piers during periods of dangerous conditions. Section I of the mou, entitled “Purpose,” states that the MOU “establishes general guidelines concerning the furnishing of assistance by the City of South Haven” in regulating the piers when danger exists. Section m, entitled “Responsibilities,” states that the corps will furnish and install the fences and gates and that South Haven has been granted responsibility to coordinate and control entrance to the piers during bad weather and to determine when the gates are to be opened and closed. Thus, the focus of the MOU is to specify the respective duties of the two parties regarding restricting access to the pier.⁴

Notwithstanding this, it is undoubtedly the case that the underlying concern in regulating access to the piers was public safety. Section v, entitled, “Federal Pier Regulations,” states that “[t]he public” shall be restricted from the piers under specified conditions. Yet to acknowledge this does not answer the question under § 1405, whether the language of the mou evinces a promise by South Haven by which it undertook, either directly or by suitable class designation, an obligation directly to or for plaintiffs’ daughter.

Greenlees is instructive regarding this issue because it limned the minimum level of specificity required to put contracting parties on notice that they are empowering third parties to enforce a contract. At issue in Greenlees was a contract between a landlord and a remodeling contractor. The plaintiff, a tenant with a furrier business in the building, claimed that drilling by the contractor resulted in dust damage to his furs. The plaintiff sued the contractor, claiming to be a third-party beneficiary of the remodeling contract. The contract included a provision that the remodeling work was to be performed “in such a way as to cause a minimum of disturbance to the daytime operations in the building.” Id. at 676. This was sufficiently specific because the Greenlees Court held that this contract provision “was a promise within the meaning of the [third-party beneficiary] statute for the benefit of the tenants as a class who are habitually carrying on the daytime operations in the building . . . ” Id. at 677. In other words, it found that the plaintiff was one of a class of direct beneficiaries that had been “sufficiently described or designated” in the contract. See Guardian Depositors, supra at 438. Accordingly, the Greenlees plaintiffs ability to proceed under a third-party beneficiary theory turned on the fact that a contract provision directly required the contractor to minimize the disturbance to “daytime operations in the building” — a designated class that included the plaintiffs furrier business.⁵

In contrast, the MOU at issue here only references the public generally and includes no provision by which South Haven undertook to do anything directly for a designated class of persons that included plaintiffs’ daughter. This is simply too broad a term to constitute a class that as contracting party could undertake directly to benefit under subsection 1405(1).

It would demolish the limitations in the statute to imply a class on the basis of who might be injured by a breach of South Haven’s responsibilities under the MOU. Yet this is indeed what the dissent would hold by finding the class to be those members of the public who are on the piers during dangerous conditions. This reasoning would, of course, mean that virtually every contract could be viewed as impliedly creating a class of third-party beneficiaries because the inquiry would proceed backward from an injury to create a class. Such an analysis robs the statute of all meaning.⁶

Here, had the mou more specifically described a class of beneficiaries, e.g., anglers, or swimmers, instead of using the all-encompassing term “the public,” there could be no doubt that the parties would have been aware that they were directly undertaking to benefit the particular class. This is the requirement the Legislature has enacted, and it is our duty not to obliterate it by giving it a reading, such as the dissent does, that makes it impossible to draw a line between those eligible to sue as third-party beneficiaries and those not eligible. Accordingly, South Haven’s promises under the MOU may not be construed as an undertaking directly for the general public. Absent contractual language demonstrating an undertaking directly for the benefit of plaintiffs’ daughter or a sufficiently designated class that would include her, plaintiffs cannot establish that she was a third-party beneficiary of the mou under § 1405. Therefore, plaintiffs cannot establish a breach of contract claim under the MOU as a matter of law.

CONCLUSION

For these reasons, we conclude that plaintiffs’ daughter was not an intended third-party beneficiary of the MOU and that their breach of contract count fails as a matter of law. Accordingly, we would reverse the Court of Appeals decision and reinstate the trial court’s grant of South Haven’s motion for summary disposition of plaintiffs’ breach of contract count.

Corrigan and Young, JJ., concurred with Taylor, J.

1 The trial court dismissed Allen Vanderberg, one of the individual defendants, because he was not employed by the city on the date of the incident. In a separate order, the trial court clarified that the remaining issue for trial was plaintiffs’ claim of gross negligence against the individual defendants.

2 The Court of Appeals indicated that it would have reversed the trial court’s denial of a directed verdict under this theory if the jury had not already resolved the issue in favor of defendants. Id. at 729-730.

3 Further, the context in which Michigan adopted the third-party beneficiary statute also offers guidance in construing the current statute. From the time of statehood, Michigan adhered to the English common-law rule prohibiting third parties from suing on a contract. Guardian Depositors Corp v Brown, 290 Mich 433, 438; 287 NW 798 (1939). The Legislature, as is its prerogative, changed this in 1937 by adopting the predecessor of § 1405, which abrogated the total bar and allowed enforcement of a contract by a third party who was the direct beneficiary of the contract. This Court has repeatedly spoken regarding the construction of statutes in derogation of the common law:

[Statutes in derogation of the common law must be strictly construed, and will not be extended by implication to abrogate established rules of common law. The statute, however, must be construed sensibly and in harmony with the legislative purpose. [Rusinek v Schultz, Snyder & Steele Lumber Co, 411 Mich 502, 508; 309 NW2d 163 (1981) (citation omitted).]

Where there is doubt regarding the meaning of such a statute, it is to be “given the effect which makes the least rather than the most change in the common law.” [Energetics, Ltd v Whitmill, 442 Mich 38, 51; 497 NW2d 497 (1993) (citation omitted).]

Thus, in applying § 1405, we must be cognizant that, inasmuch as the ability of third-party beneficiaries to enforce a contract was largely unrecognized in Michigan until adoption of the statute, it is to be narrowly construed. (We note that the Guardian Depositors Court at 439 contended that the third-party beneficiary statute is a “remedial” statute that is to be liberally construed. In Rookledge v Garwood, 340 Mich 444, 453; 65 NW2d 785 (1954), this Court quoted 50 Am Jur, Statutes, § 15, pp 33-34 as the “definitive rule” defining remedial legislation:

“Legislation which has been regarded as remedial in its nature includes statutes which abridge superfluities of former laws, remedying defects therein, or mischiefs thereof implying an intention to reform or extend existing rights, and having for their purpose the promotion of justice and the advancement of public welfare and of important and beneficial public objects, such as the protection of the health, morals, and safety of society, or of the public generally.”

Because the third-party beneficiary statute does not meet these criteria, we disavow the Guardian Depositors Court’s assertion that it is a “remedial” statute requiring liberal construction. It is the case then that the obligation to narrowly construe § 1405 underscores the importance of giving meaning to the modifier “directly” in applying this provision.

4 This language belies the dissent’s contentions that “it cannot be argued that the [mou] was ‘primarily,’ or even at all for the benefit of ‘the parties thereto’ ” and that “[t]he only reason” the parties entered into the mou was to protect the public. Post at 694-695.

5 The dissent questions whether the dust damage to the plaintiff’s furs in Greenlees constituted a breach of the defendant’s promise under the contract. This is, at best, a red herring. The issue before the Greenlees Court, and decided by it, was whether the plaintiff could claim third-party beneficiary status. The issue whether there was a breach of the contract is downstream from that adjudication.

6 Additionally, the argument that South Haven could have easily protected the public by closing and locking the gates is irrelevant to the issue at hand: whether the mou’s reference to “the public” sufficiently designates a class to confer third-party beneficiary status. That no one would have been hurt if the gates were closed does not bring us closer to an answer to the question before us.