Tuesday, August 31, 2004
C.A.: Employees Were Third-Party Beneficiaries in Sale of Company
By DAVID WATSON, Staff Writer
Employees of a Hewlett-Packard subsidiary were third-party beneficiaries of an amendment to the agreement selling the subsidiary which limited the new owner’s right to terminate them, the Third District Court of Appeal ruled yesterday.
Justice George Nicholson said Placer Superior Court Judge John L. Cosgrove erred in granting the new owner, Gores Technology Group, summary judgment in a suit brought by employees of VeriFone, Inc. to enforce the amendment. Hewlett-Packard sold its controlling interest in VeriFone to GTG in April 2001.
GTG terminated a number of VeriFone employees within a week of the acquisition, despite an amendment to the stock sale agreement under which GTG agreed not to terminate the workers for 60 days and to pay them specified benefits if they were terminated during the next 90 days.
GTG paid the terminated workers two months salary, plus another four months salary if they would sign a release. But four 20-year VeriFone employees refused to sign and sued.
Cosgrove ruled they were not parties to the agreement or the amendment, noting that the stock sale contract expressly stated it was not intended to confer rights “upon any Person other than the parties hereto,” with specified exceptions.
But Nicholson, joined by Justices Rod Davis and Vance W. Raye, said Cosgrove was wrong.
He noted that Civil Code Sec. 1559 provides that a contract “made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.”
Citing Gilbert Financial Corp. v. Steelform Contracting Co. (1978) 82 Cal.App.3d 65, Nicholson said that the term “expressly” in the statute, “by judicial interpretation, has now come to mean merely the negative of ‘incidentally.’”
“Generally, it is a question of fact whether a particular third person is an intended beneficiary of a contract….However, where, as here, the issue can be answered by interpreting the contract as a whole and doing so in light of the uncontradicted evidence of the circumstances and negotiations of the parties in making the contract, the issue becomes one of law that we resolve independently.”
The amendment to the contract was a “classic third party provision,” Nicholson said.
“It is patently intended to preclude early termination of the affected employees and to provide those terminated soon after the closing with severance benefits similar to what they would have received had they been terminated when employed by Hewlett-Packard,” the jurist wrote. “The provision expressly benefits them, and only them.”
Nicholson noted that GTG also agreed, in executing the amendment, to extend its indemnity obligations to Hewlett-Packard to include any breaches of the new promise.
“It is difficult for GTG to argue [the amendment] did not intend to benefit plaintiffs when GTG gained nothing from agreeing to its terms,” he commented.
Nicholson conceded that the appellate court’s interpretation of the amendment was inconsistent with the contract provisions barring third party benefits. But under “well established principles of contract interpretation, when a general and particular provision are inconsistent, the particular and specific provision is paramount to the general provision,” he said.
The case is Prouty v. Gores Technology Group, C043764.
Copyright 2004, Metropolitan News Company