gavel-Article-201710131541-Article-201711162405On Feb. 15, 2018, the New York Court of Appeals, in Dormitory Authority of the State of New York v. Samson Constr. Co., 2018 NY Slip Op. 01115, issued a significant opinion discussing contract third-party beneficiaries and duplication of causes of action in contract and malpractice.

In 2000, the City of New York began planning for a new Medical Examiner (ME) lab about 20 feet from an existing City-owned building. The City approached the Dormitory Authority of the State of New York (DASNY) to handle the job. DASNY contracted with the City in August 2001 for DASNY to design and manage the construction. The lab was to include two below-ground floors.

DASNY contracted in July 2001 with Perkins-Eastman Architects (Architect) to design and administer the job. The Architect’s contract stated the Architect would interview the City to develop a program, the Architect’s final cost estimate would be reviewed by the City, the Architect would comply with City procedures, and the ME would use the finished lab. The Architect contract did not state the City was a third-party beneficiary.

In 2002, DASNY contracted with a contractor to drive sheet piling (an option in the Architect’s plans) supplying lateral support for the adjacent building, excavate the lab’s footprint, and construct foundations. This contract stated the City was a third-party beneficiary.

In 2002, driving sheet piling caused ground vibrations. The adjacent building quickly sank several inches. The contractor in 2003 accidentally removed some steel sheeting, causing the ground to cave-in. The adjacent building sank again. The City funded and DASNY paid the cost of jacking up and protecting the adjacent building. The lab was substantially completed in February 2007.

DASNY and the City jointly sued the Architect in February 2007. They pleaded the facts, then the Architect’s alleged malpractice concerning the sheet piling, and then concluded with separate causes in contract and malpractice. A discovery stage damage itemization was the same for each cause.

CPLR 214(6) provides a three-year statute of limitations against an architect in both malpractice (accruing on the date of injury) and contract (accruing on the job’s substantial completion). Suit was late if in malpractice.

The Architect moved for summary judgment, arguing suit was in malpractice. The City responded suit was in contract as the City was a third-party beneficiary of the Architect’s contract. The Architect also moved to dismiss DASNY’s malpractice cause as duplicative of the contract cause. The motion court dismissed both of the City’s causes, but denied the duplicative cause motion.

The City and the Architect appealed. The Appellate Division unanimously reversed dismissal of the City’s contract cause because of issues of fact as to whether the City was a beneficiary. By a 2-1 vote, the two DASNY causes were found not duplicative.

The Architect appealed. The Court of Appeals reversed, holding that the City was not a beneficiary (6-1), and that the DASNY malpractice cause was duplicative of its contract cause (5-2).

Third-Party Beneficiary

The Court of Appeals reasoned a contract makes someone a third-party beneficiary in two situations: if the third party is the only one who could recover for breach, or the contract itself is clear in its intent to allow the third party to enforce the contract. The first did not apply—DASNY was a plaintiff. As to the second, the fact that the City was the end user was insufficient to show intent. In construction contracts, there are practical reasons not to create third-party beneficiaries absent express language stating precisely this. The sheet piling contract showed DASNY knew how to make someone a third-party beneficiary.

A dissent argued that the City retained control over the job’s budget, approved the design, selection of contractors, and construction. The Architect therefore knew the City was the ultimate beneficiary.

The court did not discuss District of City of Newburgh v. Hugh Stubbins & Assoc., 85 N.Y.2d 535 (1995) (Stubbins) involving a similar fact pattern. In Stubbins, the Urban Development Corporation (UDC) and a school district contracted for UDC to finance, hire the architect and contractors, and manage building a library for the district’s end use. After the building’s 1976 completion, UDC sold it to the district. A pipe installed during construction broke in 1990, flooding the library. The district sued the architect for malpractice in design/administration. The architect contended suit was in contract, accruing on completion. Because the UDC-architect contract did not expressly make the district a third-party beneficiary, the district responded suit was in malpractice. The architect replied the district was a third-party beneficiary, offering UDC-district contract terms showing the district’s involvement in the job budget, design approval, and construction monitoring. The Court of Appeals held the district was a third-party beneficiary.

In Dormitory Authority, the City copied Stubbins, tersely describing the City’s involvement with DASNY in budget, design and construction. Why the different result? In Stubbins, the architect conceded the district was a third-party beneficiary, offering the UDC-district contract as evidence of UDC’s intent to grant the district rights against the architect. In Dormitory Authority, City conduct was not linked to the Architect. Evidence was lacking of the Architect’s intention to grant the City rights against the Architect. All contracting parties must join to create a third-party beneficiary.

A third-party beneficiary can be limited to enforcing a single contract term. For example, a subcontractor’s written warranty to return and repair may expressly run to an owner, but the owner would not be able to invoke the remainder of the subcontract. Similarly, the DASNY-Architect contract, in boiler plate, provided that the Architect would indemnify the City for claims arising out of the Architect’s malpractice, and that the Architect would procure CGL insurance with the City an additional insured. The City was a third-party beneficiary of these terms only.

Circumstances are important in creating a third-party beneficiary. Contract terms can limit such evidence. If an architect’s contract is integrated, the parol evidence rule should bar evidence of pre-contract negotiations concerning a third-party beneficiary. A GOL §15-301 contract term would also bar evidence of subsequent oral modification.

Dormitory Authority frowned on multiple plaintiffs asserting the same contract right offensively, but did not consider a defensive third-party beneficiary. When an owner hires an architect and sues the architect and an employee architect for malpractice, the employee will also invoke any contract limitations of liability. Is the employee a third-party beneficiary absent express language? Implication may outweigh express language.

Dormitory Authority has other consequences. The owner hiring a design-build contractor—with architect as subcontractor—may not be a third-party beneficiary of the subcontract. A developer using a single purpose entity to build may find it is without a contract cause against the architect. A remote purchaser of a unit/building will be less likely to be a third-party beneficiary.

Duplicative Causes Against a Professional

Prior to Dormitory Authority, an owner would sue his architect both in contract and malpractice. The owner did not have to elect between causes until inconsistency was unavoidable, generally at trial.

Contract and malpractice have many inconsistent principles. Contract measures damages assuming proper performance; tort measures damages from the position prior to injury. Contract has distinctive damage rules such as remoteness. Comparative fault, contribution, collateral source (insurance) payments, admissibility of subsequent repairs, nonfeasance, responsibility for subconsultants, waiver/consent, and causation are treated differently.

The Court of Appeals reasoned that election occurred earlier. The DASNY Architect contract contained language that:

Extra costs to [DASNY] resultant from design errors or omissions shall be recoverable from the Architect and/or its Professional Liability Insurance carrier.

Malpractice was within the parties’ contemplation when contracting. The itemization showed contract and malpractice damages were the same. These showed DASNY was essentially seeking enforcement of its bargain. Therefore, malpractice duplicated contract. A concurring judge pointed out the parties’ sophistication.

An owner suing an architect can, by careful pleading, deter a duplicative cause motion. Alleging different facts and damages in malpractice and contract, and later furnishing differing damage itemizations for each cause, may suffice. Because Dormitory Authority was an action against an architect entity only, suing an individual architect for malpractice may show there is no duplication.

Dormitory Authority’s duplication rule is simple. Review the architect’s written contract for a risk. If the suit is based on the risk, the cause is in contract. But this ignores building industry practice. Many owner-architect contracts use the words “design errors.” The AIA standard architect contract requires the owner give the architect written notice of design errors. An architect’s contract may require procuring of malpractice insurance. Because the contract describes a risk does not mean the parties chose contract over negligence. Failure to treat a risk substantively may reflect an intention to fill gaps by principles implied by law. Intention should be explicit before contract trumps negligence.

Eugene H. Goldberg is an attorney at Gallet Dreyer & Berkey.