Brief Fact Summary. Defendant was hired by MidAmerica Savings Bank (MidAmerica) to monitor the progress of construction for a new home for the Plaintiffs, Mr. and Mrs. Vogan. When the contractor defaulted on his contract, and construction expenses overran the agreed-upon price, Plaintiffs brought suit against Defendant for negligent monitoring of the funds, as they were the third party beneficiaries of Defendant’s agreement with MidAmerica.
Synopsis of Rule of Law. A third party beneficiary can recover damages when a party in breach has reason to know that the beneficiary will be harmed by their negligence.
Issue. May a third party beneficiary, here the Plaintiffs, recover damages from the breach of the contract which was to their benefit?
Held. Yes. Reversed.
The Iowa Supreme Court reversed the judgment of the appellate court and reinstated the judgment of the district court, holding that Plaintiffs could recover as third party beneficiaries.
Defendant knew that its services were for Plaintiffs’ benefit. The Court reasoned that the Plaintiffs were injured and entitled to damages because their expenditures were linked to the improper appraisals and monitoring done by Defendant.
Discussion. Generally a third party cannot recover against a party with whom they do not have a contract. However, if the negligent party has reason to know that a third party will be injured by their breach, and that their performance is being rendered directly to benefit another party, a third party may be able to recover damages spent as a third-party beneficiary.