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When a Third Party Can Recover for Breach of Contract in NY


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5/29/2018
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Earlier this year, New York's Court of Appeals revisited a question that is particularly vexing, at least from a practical perspective, in the breach of contract context:

Under what circumstances - if any - can a third-party, i.e., someone who was not one of the two main parties to an agreement, recover their damages when the contract?

To be sure, this issue does come up - frequently enough - in the "real world," particularly in the construction context.

Although the rule remains somewhat vague, when you consider how exceedingly difficult it would be to articulate a bright-line test, this effort, as set forth below, isn't that bad:

"[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" (Port Chester Elec. Constr. Corp. v Atlas, 40 NY2d 652, 655 [1976] [citations omitted]).

"We have previously sanctioned a third party's right to enforce a contract in two situations: when the third party is the only one who could recover for the breach of contract or when it is otherwise clear from the language of the contract that there was "an intent to permit enforcement by the third party" (Fourth Ocean Putnam Corp. v Interstate Wrecking Co., 66 NY2d 38, 45 [1985])."

How New York's Courts Have Applied These Rules in the Construction Context

In that regard, earlier this year the Court of Appeals applied the foregoing criteria in Dormitory Auth. of the State of NY v. Samson Constr. Co., in affirming the dismissal of the breach of contract action brought by the plaintiff/third-party beneficiary, stated, in pertinent part, as follows: 

"With respect to construction contracts, we have generally required express contractual language stating that the contracting parties intended to benefit a third party by permitting that third party "to enforce [a promisee's] contract with another" (Port Chester, 40 NY2d at 656).

"In the absence of express language, "[s]uch third parties are generally considered mere incidental beneficiaries" (40 NY2d at 656). This rule reflects the particular nature of construction contracts and the fact that—as is the case here—there are often several contracts between various entities, with performance ultimately benefitting all of the entities involved" (Emphasis supplied).

The Takeaway

If nothing else, a reading of the caselaw on this subject makes clear that a breach of contract action is not simply there for the asking by a purported third-party beneficiary to an agreement; there are some very specific criteria that must be present in order for such a claim to survive dismissal as a matter of law.

As a corollary to that rule, it would therefore behoove anyone contending with such an issue to consult with an attorney that is intimately knowledgeable about this area of the law, because correctly pleading such a claim (and marshalling the necessary proof to support the claim) can easily mean the difference between winning and losing.

 



Category: Breach of Contract

Jonathan Cooper
Non-Compete, Trade Secret and School Negligence Lawyer

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