George Bundy Smith and Thomas J. Hall
George Bundy Smith and Thomas J. Hall ()

In New York, it is considered “old law” that a non-party to a contract may sue to enforce the contract if it was made for its benefit.1 To establish a third-party beneficiary claim, the party must demonstrate that it is an intended beneficiary of the contract. The New York Court of Appeals has generally held that this requires proving that (1) there exists a valid contract between the contracting parties; (2) the contract was intended for the third party’s benefit; and (3) the benefit to the third party is clear and direct and not merely incidental.2 If the third party fails to prove one or more of these elements, it is at best an incidental beneficiary of the contract and cannot sue to enforce it.3

While “[i]t is ancient law in New York that to succeed on a third-party beneficiary theory, a non-party must be the intended beneficiary of the contract,”4 recent Commercial Division cases reveal some difficulty in identifying which third parties qualify as intended beneficiaries. By drawing various factual distinctions, emphasizing distinct parts of the legal standard, and relying on divergent precedent from the Appellate Division, the Commercial Division has demonstrated not only that clearer guidance is required from the Court of Appeals on third-party beneficiary law, but also that at times only a very special type of plaintiff will qualify as an intended beneficiary of a contract.

New York Precedent

In their application of the general test established by the Court of Appeals, the Second, Third and Fourth Departments have in the past directed courts to look at the circumstances surrounding the contract’s formation to determine a party’s status as a third-party beneficiary. These Departments appear to agree that the obligation or rights to the third party do not need to appear expressly in the contract. For example, the Second Department has consistently stated that “[i]n determining third-party beneficiary status it is permissible for the court to look at the surrounding circumstances as well as the agreement. Moreover, it is well settled that the obligation to perform to the third-party beneficiary need not be expressly stated in the contract.”5 Similarly, the Third Department, in Lake Placid Club Attached Lodges v. Elizabethtown Builders, held that the “plaintiff ha[d] failed to submit any evidence from the contractual language or other circumstances manifesting a mutual intent of the contracting parties to confer rights to performance on” it.6

The Fourth Department puts it more directly: “An express contractual provision concerning third-party beneficiaries is but an alternative factor upon which a court might base a finding that a certain party is, in fact, a third-party beneficiary.”7 Thus, applying the law of these Departments, a third party usually can feel comfortable relying on the surrounding circumstances to argue that it is an intended third-party beneficiary.

The First Department, however, has afforded a somewhat different approach on how the surrounding circumstances shape a party’s status as an intended beneficiary of a contract. The First Department has held that “the parties’ intent to benefit the third party must be apparent from the face of the contract.”8 Recently, in denying a third-party beneficiary claim, the First Department stated that “[t]he absence of any clear language on the face of the sale agreements regarding any third-party beneficiary rights precludes reliance on subsequent documents to raise an issue of fact.”9 Such language suggests that, absent contractual support, a court should not rely solely on the surrounding circumstances to determine if a party is an intended beneficiary of a contract.

The appellate courts’ somewhat disparate views on how the surrounding circumstances should shape the third-party beneficiary analysis have a common genesis. In Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., the New York Court of Appeals adopted the terminology and concepts on third-party beneficiary law found in the Restatement (Second) of Contracts.10 According to the Restatement, a third party is an intended beneficiary 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 promisee to pay money to the beneficiary; or (b) if the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.”11

While adopting the Restatement’s position, the Court of Appeals nonetheless stated that “we have emphasized when upholding the third party’s right to enforce the contract…that the language of the contract otherwise clearly evidences an intent to permit enforcement by the third party.”12 Thus, lower courts were left with the difficult task of determining how the surrounding circumstances should shape which parties qualify as intended beneficiaries of a contract.

Commercial Division

Several recent Commercial Division decisions applying this precedent highlight these different approaches.

On Feb. 20, 2014, Justice Emily Pines of the Suffolk County Commercial Division granted summary judgment holding that a purchaser’s broker was not a third-party beneficiary of a real estate sales contract. In Saunders Ventures v. Morrow, the plaintiffs alleged that they were entitled to unpaid real estate commissions because they were third-party beneficiaries of a sales contract for property which referred to commissions for the selling broker.13 In rejecting the plaintiff’s claim, Pines cited First Department precedent for the proposition that “it must be established that the language of the subject contract clearly evidences an intent to permit enforcement by the third party.”14 Thus, even though the plaintiff presented affidavits from its president, vice president and the managing partner of the purchaser of the property to support its claim, Justice Pines determined that “nothing in that agreement…obligated [the defendants] to a broker, such as Plaintiff.”15 Hence, the surrounding circumstances alone were unable to determine the third-party’s status as an intended beneficiary of the contract.

In contrast, in Board of Education of the Northport-East v. Long Island Power Authority, the plaintiffs asserted that they were intended third-party beneficiaries of a 1997 Power Supply Agreement (PSA) between the Long Island Lighting Company and the Long Island Power Authority (LIPA).16 Citing Second Department precedent, Justice Elizabeth Emerson of the Suffolk County Commercial Division stated, “it is well settled that the obligation to perform to the third-party beneficiary need not be expressly stated in the contract.”17 Applying this principle, Emerson first noted that the overall purpose of the PSA was to benefit the parties to the contract and LIPA’s ratepayers. Nonetheless, the disputed contractual provision benefited neither the contracting parties nor the ratepayers. Thus, since the plaintiff school district had produced evidence outside the contract to support its position that the contractual provision was included to benefit it, Emerson denied the defendants’ motion to dismiss the third-party beneficiary claim. Hence, while the contractual provision did not explicitly benefit a third party, Emerson permitted the surrounding circumstances to support the plaintiffs’ claim that the contract was made for their benefit and that they were intended beneficiaries.

Finally, in Saska v. Metropolitan Museum of Art, the plaintiffs claimed that they were third-party beneficiaries of a 1878 lease between the City of New York and the Metropolitan Museum of Art that prohibited the museum from charging for admission. The plaintiffs asserted that under the museum’s “pay what you wish” admissions policy, almost all visitors would pay something in order to enter the museum, and that, as a result, this policy violated the museum’s lease. Justice Shirley Kornreich of the New York County Commercial Division rejected the plaintiffs’ third-party beneficiary claim finding that “nothing in the lease suggests that the City intended for members of the public who disagree with the City’s policies regarding the Museum to be allowed to circumvent the City’s wishes by suing the Museum directly.”18

The court quoted from a First Department decision, which stated: “[I]n 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,”19 Therefore, while Kornreich noted that “New York has adopted the standard set forth in section 302 of the Restatement (Second) of Contracts to determine if a party was an intended beneficiary,”20 the lack of any contractual support demonstrating an intent to benefit the third party appeared to foreclose the possibility that any surrounding circumstances could establish that the parties were intended beneficiaries of the contract.

Conclusion

Recent Commercial Division cases demonstrate that the Appellate Departments have developed somewhat antithetical, yet equally supported, views on how circumstances surrounding a contract’s formation can affect a party’s status as an intended beneficiary of a contract. In the Second, Third and Fourth Departments, the surrounding circumstances alone may be an important consideration in the analysis; yet, in the First Department, they appear to be secondary to the contractual provisions.

Until the New York Court of Appeals provides further guidance, a potential third-party beneficiary will be on firmer ground if a contractual provision demonstrates the contracting parties’ intent to benefit it. In the absence of clear contractual language, supplemental evidence alone may be insufficient to maintain a third-party beneficiary claim.

George Bundy Smith is an arbitrator and mediator with JAMS in New York City, and is a former associate judge of the New York Court of Appeals. Thomas J. Hall is a partner and the co-head of the commercial litigation practice at Chadbourne & Parke. Hiram Arnaud, a litigation associate with the firm, assisted with the preparation of this article.

Endnotes:

1. Port Chester Elec. Constr. Corp. v. Atlas, 40 N.Y.2d 652, 655, 389 N.Y.S.3d 327, 330 (1976).

2. Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182, 919 N.Y.S.2d 465, 471 (2011); Mendel v. Henry Phipps Plaza W., Inc., 6 N.Y.3d 783, 786, 811 N.Y.S.2d 294, 297 (2006).

3. Id.

4. Suffolk Cnty. v. Long Island Lighting Co., 728 F.2d 52, 63 (2d Cir. 1984).

5. Aievoli v. Farley, 223 A.D.2d 613, 614, 636 N.Y.S.2d 833 (2d Dept. 1996); see Encore Lake Grove Homeowners Ass’n, Inc. v. Cashin Associates, P.C., 111 A.D.3d 881, 882, 976 N.Y.S.2d 143, 145 (2d Dept. 2013); Belgrave Owners, Inc. v. OR Holding Corp., 233 A.D.2d 352, 354, 650 N.Y.S.2d 249, 250 (2d Dept. 1996) (“However, in determining third-party beneficiary status it is permissible for the court to look at the surrounding circumstances as well as the agreement itself.”). But see E. Coast Athletic Club, Inc. v. Chicago Title Ins. Co., 39 A.D.3d 461, 463, 833 N.Y.S.2d 585, 588 (2d Dept. 2007) (citing First Department’s position with approval).

6. Lake Placid Club Attached Lodges v. Elizabethtown Builders, Inc., 131 A.D.2d 159, 161, 521 N.Y.S.2d 165, 166 (3d Dept. 1987) (emphasis added).

7. Logan-Baldwin v. L.S.M. Gen. Contractors, Inc., 94 A.D.3d 1466, 1470, 942 N.Y.S.2d 718, 722 (4th Dept. 2012).

8. LaSalle Nat. Bank v. Ernst & Young LLP, 285 A.D.2d 101, 108, 729 N.Y.S.2d 671, 676 (1st Dept. 2001).

9. U.S. Bank Nat. Ass’n v. GreenPoint Mortgage Funding, Inc., 105 A.D.3d 639, 640, 965 N.Y.S.2d 401, 402 (1st Dept. 2013), leave to appeal denied, 2013-1140, 2014 WL 702159 (Feb. 25, 2014).

10. Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., Inc., 66 N.Y.2d 38, 44-45, 495 N.Y.S.2d 1, 5 (1985); see Nat’l Westminster Bank plc v. Grant Prideco, Inc., 261 F.Supp.2d 265, 272 (S.D.N.Y. 2003) (“New York has embraced the Restatement (Second) of Contracts approach to determining whether a party is an intended beneficiary.”).

11. Restatement (Second) of Contracts §302 (1981).

12. Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., Inc., 66 N.Y.2d 38, 44-45, 495 N.Y.S.2d 1, 5 (1985).

13. Saunders Ventures, Inc v. Morrow, 2014 WL 834118, at *2 (Suffolk Co.), 2014 NY Slip Op 30455 (U), at *2 (Pines, J.).

14. Id.

15. Id. at *3.

16. Bd. of Educ. of Northport E. Northport Union Free Sch. Dist. et al. v. Long Island Power Auth., 39 Misc.3d 1232(A), 972 N.Y.S.2d 142 (Suffolk Co. 2013), 2013 NY. Slip Op. 50860 (U), at *3 (Emerson, J.).

17. Id. at *4.

18. Id.

19. Saska v. Metro. Museum of Art, 42 Misc.3d 548, 562, 975 N.Y.S.2d 605, 616 (New York Co. 2013) (Kornreich, J.) (emphasis in original).

20. Id. at 559, 975 N.Y.S.2d at 614.