Thursday, June 25, 2009 Critical Path   VOLUME 1 ISSUE 9  
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Third-Party Beneficiary Claims Under New York Law
by Vincent P. Pozzuto and Russell G. Wheeler

New York Construction Managers are often called upon to defend claims arising for construction delay damages suffered by contractors hired directly by site owners.  Inevitably, in bringing such claims, contractors at all tiers will argue that they should be considered third-party beneficiaries of the construction manager’s contract with the site owner, and that the construction manager’s alleged dereliction of its duties to the site owner caused delays resulting in their damages. 

Under New York law, a party seeking to enforce a contract as a third-party beneficiary must establish:  (1) the existence of a valid contract between other parties, (2) that the contract was intended for its benefit and (3), that the benefit was direct rather than incidental. Edge Management Consulting, Inc. v. Blank, 25 A.D.3d 364, 368, 807 N.Y.S.2d 353, 358 (1st Dep't. 2006).  Relying on scope of work provisions, contractors will often argue that they benefit from the proper performance of contracts between construction managers and site owners.  Such provisions usually relate to construction scheduling.  While there can be no doubt that a properly scheduled and maintained project benefits trade contractors on the site, this fact alone does not establish that such contractors are “intended,” rather than “incidental,” beneficiaries of the contract between a construction manager and site owner. 

A party is an intended (rather than incidental) beneficiary of a contract if "recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promissee to pay money to the beneficiary.... or (b) the circumstances indicate that the promissee intends to give the beneficiary the benefit of the promised performance...." LaSalle Nat'l Bank v. Ernst & Young, L.L.P., 285 A.D.2d 101, 108, 729 N.Y.S.2d 671, 676 (1st Dep't. 2001)(emphasis in original) (quoting Restatement [Second] of Contracts § 302). See Roosevelt Islanders for Responsible Southtown Develp. v. Roosevelt Island Oper. Corp., 291 A.D.2d 40, 57-58, 735 N.Y.S.2d 83, 98 (1st Dep't. 2001).  Clearly, a contractor relying on construction scheduling provisions to establish itself as a third-party beneficiary would be hard-pressed to make such a showing.   

In determining whether a beneficiary is intended, New York’s highest court has also looked to the nature of the anticipated benefit.  A party will be deemed and intended beneficiary where the anticipated benefit is "sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate [them] if the benefit is lost." Mendel v. Henry Phipps Plaza, 6 N.Y.3d 783, 786, 811 N.Y.S.2d 294, 297 (2006).

The face of the relevant contract will determine whether contracting parties intended to benefit a third party. LaSalle Nat'l Bank, supra, at id. See Edge Mgmt. Consult., Inc., 25 A.D.3d at 369, 807 N.Y.S.2d at 358 ("In determining whether a third party was an intended beneficiary to a contract, the actual intent of the parties is critical. The best evidence of the contracting parties' intent is the language of the agreement itself.")

Applying these elements to the traditional construction contract, New York courts have generally found no express intention to benefit a putative third-party beneficiary, nor have they deviated from the above-stated rules. See Port Chester Electrical Constr. Corp. v. Atlas, 40 N.Y.2d 652, 656, 389 N.Y.S.2d, 327, 330-331(1976); Cerp. Constr. Co., Inc. v. J.J. Cleary, Inc, 59 Misc.2d. 489, 490-91, 299 N.Y.S.2d 560, 562 (Sup. Ct., King's Co. 1968).

Interestingly, some New York courts have recognized at least the potential for third-party beneficiary status in situations reverse to those described above; that is, where a site owner seeks to enforce the terms of agreements between contractors and materialmen or consultants.  In Facilities Development Corp. v. Miletta, 180 A.D.2d 97, 584 N.Y.S.2d 491 (3d Dep’t. 1992), for example, a site owner entered into a contract with Miletta, a design engineer, to design and supervise the rehabilitation of a heating plant.  Miletta contracted with Mechanical Construction Corporation (“Mechanical”) to act as general contractor.  Mechanical entered into a subcontract with Detroit Stoker Company (“Detroit”) for the supply of two coal stokers for the project.  When problems with the stokers prevented the project from being completed on time, the site owner brought an action against Detroit to recover as a third-party beneficiary of the contract between Detroit and Mechanical. 

The court held that the plaintiff site owner could be an intended beneficiary of the contract between Detroit and Mechanical, were circumstances to indicate that Mechanical  intended to give the plaintiff site owner the benefit of the promised performance.  It allowed the plaintiff site owner’s claims against Detroit to proceed, noting that Detroit had agreed to supply the coal stokers at the plaintiff’s facility.  As such, the court observed, the plaintiff site owner was actually receiving tangible items as a result of the agreement between Mechanical and Detroit. 

Similarly, in Ossining Union Free School Dist. v. Anderson, 73 N.Y.2d 417, 541 N.Y.S.2d 335, 539 N.E.2d 91 (1989), a school district sued the architectural firm that it had retained to evaluate the structural stability of several buildings it owned.  The school district also sued two consulting firms brought in by the architectural firm to assist in the evaluation, alleging that it had incurred the expense of unnecessarily closing one of its buildings that the consulting firms had negligently misrepresented to be structurally unsound.  

The Court of Appeals allowed the school district’s claim against the consultants to proceed, holding that a party could recover for pecuniary loss arising from negligent representations, where actual privity of contract existed between the parties or where the parties’ relationship was so close as to approach that of privity.  The Court found support in the record establishing that the two non-contractual defendants had been in direct contact with the plaintiff and could not possibly have been unaware that it would rely upon their representations.  In addition, the Court found that the two non-contractual defendants undertook their work with the knowledge that it was for the plaintiff school district alone.

For these reasons, trade contractors in New York will generally have difficulty establishing themselves to be third-party beneficiaries of contracts between construction managers and site owners, absent express contractual language creating such a beneficiary status.


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