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National Cash Register Co. v. Unarco Industries Inc.

decided: January 3, 1974.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. 70-C-1558 J. SAM PERRY, Judge.

Kiley, Fairchild, and Pell, Circuit Judges. Pell, Circuit Judge, dissenting.

Author: Fairchild

FAIRCHILD, Circuit Judge.

Plaintiff appeals from a judgment dismissing its complaint.

Plaintiff, the owner, contracted with Shook for the construction of a distribution center building for plaintiff. The contract called for installation of 23 ten-foot "dockboards" (mechanical loading platforms). Subsequently, plaintiff decided that only longer, 12 foot dockboards, not a standard size, could fulfill plaintiff's needs. Accordingly, Shook and plaintiff agreed that plaintiff would find a manufacturer that would provide the 12 foot dockboards and would pay the additional cost.

Plaintiff located defendant as a seller of dockboards, and Shook, at plaintiff's direction, made an agreement with defendant whereby defendant agreed to construct the 12 foot dockboards for $25,645. Although the parties to this contract were Shook and defendant, plaintiff played a part in its formation, as well as its later termination. Defendant did not produce the dockboards. After it became clear that defendant would not perform, defendant and Shook discussed the problem and it was agreed that the contract with defendant should be canceled.

Shook's vice president sent defendant a letter stating, in part, "we are cancelling without charge and making arrangements to procure elsewhere." Plaintiff later purchased the dockboards from another manufacturer at a cost $17,394 in excess of the amount specified in the contract between Shook and defendant. Plaintiff seeks to recover this sum from defendant.

Jurisdiction is founded on diversity. Both parties apparently accept Illinois law as controlling. Each party moved for summary judgment. The district court concluded that plaintiff has shown no right to recover for breach of the contract between Shook and defendant. Plaintiff appeals from the judgment entered accordingly.

1. Plaintiff's Standing To Sue.

Generally, one who is not a party to a contract may not recover for its breach. See, e.g., Vanderlaan v. Berry Construction Company, 119 Ill.App.2d 142, 255 N.E.2d 615 (1970). Plaintiff contends that it is a third-party beneficiary of the contract between Shook and defendant and therefore entitled to sue. Although the work performed by subcontractors ultimately accrues to the property owner, the owner is ordinarily regarded as only an incidental beneficiary of the subcontract. 1 Restatement of Contracts § 147, Illustration 1; Restatement of Contracts 2d § 133, Illustration 18 (Tent. Draft No. 3, 1967); Kircher v. Hunter, 101 Cal.App. 548, 281 P. 1047 (1929); Cox v. Curnutt, 271 P.2d 342 (Okla., 1954). Possibly plaintiff's direct involvement in the selection of defendant for the particular work, and in the formation of the contract, would call for application of a different principle here, but because subrogation is available, the question need not be answered.

Plaintiff also asserts it can maintain this action as a subrogee of Shook's claim against defendant for breach of contract.

Illinois recognizes the doctrine of subrogation as a broad, flexible tool for the accomplishment of justice. "This legal concept originated in equity, but is presently an integral part of the common law, and is designed to place the ultimate responsibility for a loss upon the one on whom in good conscience it ought to fall, and to reimburse the innocent party who is compelled to pay. Under this doctrine, a person who, pursuant to a legal liability, has paid for a loss or injury resulting from the negligence or wrongful act of another, will be subrogated to the rights of the injured person against such wrongdoer." Geneva Construction Co. v. Martin Transfer & Stor. Co., 4 Ill.2d 273, 122 N.E.2d 540, 546 (1954); Dworak v. Tempel, 17 Ill.2d 181, 161 N.E.2d 258, 263 (1959); In re Federal Facilities Realty Trust, 220 F.2d 495, 503 (7th Cir., 1955).

Plaintiff needed the peculiar sized dockboards, and obligated itself to Shook to find a source and pay the added cost. Shook was obligated to complete the building. Plaintiff had found defendant and, at plaintiff's request, defendant agreed with Shook to produce at an agreed price. Defendant's breach of its contract with Shook compelled plaintiff to find a new source and pay an even higher price. Recognizing that there may be circumstances peculiar to this case which would justify reliance on a third party beneficiary, or even an agency, theory, it seems clear that in any event equity requires that defendant should bear the burden of the increased price which plaintiff was compelled to pay. We conclude that plaintiff is a subrogee of Shook's cause of action for breach of contract, and that it was error to dismiss plaintiff's case on the ground plaintiff lacked standing.

We conclude, contrary to one of defendant's contentions, that the affidavit of plaintiff's assistant director of distribution, sufficiently shows that plaintiff in fact paid the higher price for the dockboards ultimately secured. It has been held that, under a cost-plus contract, the extra expenses resulting from a subcontractor's breach fall on the owner rather than the general contractor. Hegeman-Harris Co. v. Tebbetts & Garland Co., 262 ...

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