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New York Court of Appeals Analyzes Third-Party Beneficiary Status in Construction Cases

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  • Posted on: Feb 23 2018

In Dormitory Authority of the State of New York v. Samson Construction Co. (Feb. 15, 2018), the New York Court of Appeals was called on to address, inter alia, the question of whether the City of New York “is an intended third-party beneficiary of the architectural services contract between…Dormitory Authority of the State of New York (DASNY) and…Perkins Eastman Architects, P.C. (Perkins)….”

The facts of Dormitory are relatively simple and typical of many construction projects. The City was interested in building a forensic biology laboratory for the Office of the Chief Medical Examiner (OCME) next to Bellevue Hospital (the “Project”). The City entered into a Project Management Agreement with DASNY, pursuant to which DASNY was to finance and manage the design and construction of the Project.

DASNY entered into a contract with Perkins to provide design, architectural and engineering services. The Perkins contract provided that “Perkins would ‘indemnify and hold harmless’ DASNY and the ‘Client’ (that is, OCME…) from any claims arising out of Perkins’ negligent acts or omissions and that extra costs or expenses incurred by DASNY and the Client as a result of Perkins’ ‘design errors or omissions shall be recoverable from [Perkins] and/or its Professional Liability Insurance carrier.’”

Samson Construction Co. was also retained by DASNY to perform excavation and foundation work for the Project. The Court of Appeals emphasized that “the contract executed between DASNY and Samson provides that the Client – i.e., the City – ‘is an intended third party beneficiary of the Contract for the purposes of recovering any damages caused by Samson.’” (Brackets omitted.) Conversely, the Court noted that “[a]though there are passing references to the Client in the Perkins Contract, no analogous language providing that the City is an intended third-party beneficiary appears there.”

During the prosecution of the foundation work, the failure to properly install an excavation support system led to significant problems, including severe damage to neighboring Bellevue buildings. As a result, the Project was delayed by more than 18 months and $37 million in additional costs were incurred.

In the ensuing litigation, the City asserted, inter alia, a breach of contract claim against Perkins. In granting Perkins’ motion for summary judgment on that claim, Supreme Court held that the City was not an intended third-party beneficiary of the Perkins contract with DASNY. The Appellate Division, holding that there were factual issues as to the City’s status as a third-party beneficiary, modified Supreme Court’s order by denying that portion of Perkins’ motion for summary judgment.

The Court of Appeals reversed the Appellate Division and held that the City failed to raise any factual issues concerning its status as a third-party beneficiary and, therefore, Perkins was entitled to summary judgment. In so holding, the Court generally described the relevant law as follows:

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. 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. (Citations, internal quotation marks and brackets omitted.)

When construction contracts are at issue, the Court noted that in order to be a considered a third-party beneficiary, “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.” (Citations, internal quotation marks and brackets omitted.) Absent express language, “such third parties are generally considered mere incidental beneficiaries.” (Citations, internal quotation marks and brackets omitted.) The Court explained that “[t]his 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.”

In applying the previously quoted “two-situation” analysis to the facts of Dormitory, the Court found that the City was not a third-party because “the City is not the only entity that can recover under the Perkins Contract” and “the Perkins Contract does not expressly name the City as an intended third-party beneficiary nor authorize the City to enforce any obligations thereunder….”

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