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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: August 7, 2019

Plaintiff Can Bring Suit as Third-Party Beneficiary of Contract

On July 8, 2019, Justice Cohen of the New York County Commercial Division issued a decision in HTRF Ventures, LLC v. Permasteelisa N. Am. Corp., 2019 NY Slip Op. 32095(U), holding that a plaintiff was a third-party beneficiary of a contract, explaining:

Permasteelisa argues that HTRF was not an intended third-party beneficiary of the design build agreement, and thus, cannot recover for breach of contract or breach of express warranty. Specifically, Permasteelisa contends that: (1) there is no express language indicating that HTRF was an intended third-party beneficiary; and (2) there is no evidence that Turner would have been unable to bring this litigation. HTRF maintains, however, that the design build agreement and construction management agreement expressly indicate that HTRF was the intended beneficiary of the Work and may directly enforce the guarantees and warranties provided in the design build agreement against Permasteelisa.

A third party may sue as a beneficiary on a contract made for [its] benefit. However, an intent to benefit the third party must be shown, and absent such intent, the third party is merely an incidental beneficiary with no right to enforce the particular contracts. The Court of Appeals has held that a third party has the right to enforce a contract in two situations: (1) when the third party is the only one who could recover for the breach of contract; or (2) when it is otherwise clear from the language of the contract that there was an intent to permit enforcement by the third party.

With respect to the latter situation, the First Department has held that a third party cannot be deemed an intended beneficiary of a contract unless the parties’ intent to benefit the third party is apparent from the face of the contract. Absent clear contractual language evincing such intent, New York courts have demonstrated a reluctance to interpret circumstances to construe such an intent. Here, the design build agreement unambiguously evinces an intent to permit enforcement by HTRF. Article XXI of the design build agreement states that “Subcontractor [Permasteelisa] warrants to the Owner … that all materials and equipment furnished under this Agreement will be of first class quality and new, … that the Work performed pursuant to this Agreement will be free from defects and that the Work will strictly conform with the requirements of the Contract Documents”. In addition, Article XXI states that “Subcontractor [Permasteelisa] shall expeditiously remove, replace and/or repair at its own expense and at the convenience of the Owner any faulty, defective or improper Work, materials or equipment. Significantly, Article II states that “Subcontractor [Permasteelisa] agrees … to assume toward Turner all of the duties, obligations and responsibilities that Turner by those Contract Documents assumes toward the Owner …. ”

The construction management agreement provides, in section 13.1.2, that “Construction Manager shall obtain from Trade Contractors and Sub-trade Contractors … warranties which meet or exceed the requirements of the Contract Documents. All such warranties shall be deemed to run to the benefit of Owner’. Section 13.1.3 also states that “[a]ll warranties provided by any Trade Contractor or Sub-trade Contractor … shall be in such form as to permit direct enforcement by Owner against any Trade Contractor or Sub-trade Contractor …. “.

Permasteelisa’s reliance on Dormitory Auth. of the State of N. Y., supra, is misplaced. There, the Court of Appeals held that the City of New York was not an intended third-party beneficiary of an architectural services contract because: (1) the City was not the only entity that could recover under the contract; and (2) the contract did not expressly name the City as an intended third-party beneficiary or authorize the City to enforce any obligations thereunder. Here, in contrast, the parties expressly agreed that the guarantees and warranties would be enforceable by HTRF.

(Internal quotations and citations omitted).

Usually, the only parties who have rights under a contract are the parties that signed the contract. As discussed here, sometimes a person who did not sign a contract nonetheless has rights under a contract that it can sue to enforce. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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