Notes - Lewis v. Benedict Coal Corp.

NOTE

1. The decision in the Lewis case was, of course, based partly on provisions of the Taft-Hartley Act and partly on theories of public policy which the Court found persuasive with respect to collective bargaining agreements but which it might not have found equally persuasive with respect to the "typical" or "usual" third party beneficiary contract. However, if, for the sake of the argument, we take Justice Brennan's opinion as a contribution to private contract law, the decision is that the promisor (Benedict) when sued by the beneficiary (the trustees) may not interpose as a defense the promisee's (union's) breach of the promisor-promisee contract. The promisor must pay the beneficiary and bring a separate action against the promisee to recover damages for the breach. Do you think that is necessarily an unsound rule or do you prefer the approach suggested in the quotation from Corbin? Would what we may call the Brennan rule lead to a sensible result if applied (with respect to the fraudulent misrepresentation defense) in the Rouse case, supra p. 1428? Are there some types of cases in which the promisee's breach should be a defense to the promisor when sued by the beneficiary and other types in which Justice Brennan's solution might be preferable?

2. The applicability of general contract principles to collective bargaining agreements is admirably discussed in Summers, Collective Agreements and the Law of Contracts, 78 Yale L.J. 525 (1969). Professor Summers comments that "the legal rules governing everyday commercial contracts can contribute little but mischief when applied to collective agreements, but the basic principles of contract . . . can make valuable contributions to the law of collective agreements." 78 Yale L.J. at 527 . . Professor Summers discusses the contract third party beneficiary rules in the context of collective agreements at 538 et seq.

3. In Aetna Insurance Co. v. Eisenberg, 294 F.2d 301 (8th Cir. 1961), Aetna had issued a Furriers' Customers Basic Policy to Eisenberg, the owner of a fur store who stored furs for his customers. Under the policy Eisenberg was authorized to issue "Storage Receipts" to his customers which stated that the furs in storage were insured up to a stated amount under the Aetna policy. Eisenberg was required to make monthly reports to Aetna of the stated value of the furs for which he had issued Storage Receipts and to pay monthly premiums based on that value. After a fire had destroyed furs covered by such Storage Receipts, it was discovered that Eisenberg in his monthly reports had consistently and grossly undervalued the furs in storage; by reason of the undervaluation he had, of course, paid lower premiums to Aetna than he would have had to pay if he had declared their actual value. The holders of Storage Receipts brought actions directly against Aetna. Aetna defended on the ground of Eisenberg's breach of his duty to Aetna in filing the false monthly reports. The court held that the holders of Storage Receipts were third party beneficiaries of Eisenberg's policy with Aetna and that Aetna was "estopped" to defend on the ground that Eisenberg (promisee) had breached his contract with Aetna (promisor). The court stressed the fact that Aetna had accepted Eisenberg's reports without making an independent check of whether the reports were true or false. Do you think the case would have been decided the same way if Eisenberg had failed to pay any premium for the month in which the fire took place?

In its discussion of the "estoppel" point the court, in a string citation, referred to the Rouse case, supra p. 1428, as one in which the plaintiff had not made the argument that the defendant (promisor) was estopped. Do you think that the United States, in the Rouse case, could have successfully argued that Rouse was estopped to raise the defense of Winston's fraudulent misrepresentation? Would the estoppel theory have been helpful to Justice Brennan as an alternative explanation of the Supreme Court's decision in the Lewis case? If you agree that Aetna should have been held liable to the holders of the Storage Receipts, can you suggest any theory, other than that of estoppel, to justify the result?

4. The Restatement Second deals with the question of availability of defenses against a beneficiary in §309:

Defenses Against the Beneficiary

(1) A promise creates no duty to a beneficiary unless a contract is formed between the promisor and the promisee; and if a contract is voidable or unenforceable at the time of its formation the right of any beneficiary is subject to the infirmity.

(2) If a contract ceases to be binding in whole or in part because of impracticability, public policy, nonoccurrence of a condition, or present or prospective failure of performance, the right of any beneficiary is to that extent discharged or modified.

(3) Except as stated in Subsections (1) and (2) and in §311 or as provided by the contract, the right of any beneficiary against the promisor is not subject to the promisor's claims or defenses against the promisee or to the promisee's claims or defenses against the beneficiary.

(4) A beneficiary's right against the promisor is subject to any claim or defense arising from his own conduct or agreement.

Under the approach of the Restatement Second, how would you decide the Rouse case? The Lewis case? The Eisenberg case? The hypothetical variants on Lawrence v. Fox suggested in the Introductory Note to this section?