Third-Party Beneficiaries and Contract InterpretationPrint Article
- Posted on: Nov 29 2023
In Stagen v. Neu, 2023 N.Y. Slip Op. 06105 (1st Dept. Nov. 28, 2023) (here), the Appellate Division, First Department addressed an issue of contract interpretation involving a word in a settlement agreement that most readers would think has a distinct and undisputed meaning – “employ”. As discussed below, the Court found an issue of fact as to what it means to be “employed” in the context of the record before it.
The Court also touched upon the law surrounding third-party beneficiaries of contracts. As discussed below, the Court found that based upon the prominence of the third-party in the agreement between the parties, the parties intended to make that third-party a beneficiary of the subject agreement.
The plaintiff in Stagen worked as the president of Eden Wood Realty LLC (“Eden”) from April 2017 through October 2022. Plaintiff alleged that in May 2022, defendant entered into a settlement agreement with her father, Richard (“Richard”), in which they both agreed that upon Richard’s retirement, defendant would become president of Eden. The settlement agreement also provided that, until his retirement, Richard had the sole discretion about whether to retain plaintiff as president of Eden and then, if plaintiff remained employed at the time of Richard’s retirement, plaintiff would stay on under the same terms. It also permitted defendant to remove plaintiff if she made a “good faith determination” that plaintiff could no longer perform his duties.
Richard retired in August 2022. In October 2022, defendant terminated plaintiff from his employment at Eden. Plaintiff contended that defendant could not possibly have made a good faith determination about his ability to do the job. Plaintiff sued, asserting a single cause of action for breach of contract.
Defendant moved to dismiss. Defendant insisted that the settlement agreement cited by plaintiff arose after years of litigation with her father and related to other businesses in addition to Eden. Defendant maintained that plaintiff was no longer an employee of Eden as of the date of her father’s retirement and that another entity, Phyllis Cory Consulting Corp. (“Phyllis Consulting”) was actually paying plaintiff to provide services to Eden.
Defendant argued that the provision in the settlement agreement contained a condition precedent—namely that plaintiff remain employed by Eden—at the time of Richard’s retirement. She insisted that because plaintiff was working for Phyllis Consulting, and not Eden, at the time of her father’s retirement, he could not seek relief under the subject provision.
Defendant also contended that the complaint failed to allege that plaintiff was an intended third-party beneficiary of the settlement agreement. Defendant argued that the settlement agreement did not mention Phyllis Consulting and so plaintiff could not seek the benefit of an agreement given that Phyllis Consulting was the entity who paid him.
Plaintiff argued that he stated a cause of action for breach of contract. He claimed the provision that cites him in the settlement agreement (i.e., paragraph 6) between defendant and her father specifically conferred him with benefits and entitled him to bring this lawsuit. That provision provided that:
After Richard chooses to retire in his sole and absolute discretion, or dies, Amy shall become the President of Eden Wood. Until that time, the decision whether to continue to employ Stagen by Eden Wood shall be Richard’s alone. Thereafter, and assuming that as of that time Stagen remains employed by Eden Wood, Eden Wood shall continue to employ Stagen on terms no less favorable to Stagen than those in place on the date of Richard’s retirement or death, unless and until Stagen voluntarily retires or Amy makes a good faith determination that Stagen is no longer capable of performing his employment duties competently.
Plaintiff claimed that he was employed by Eden at the time he was fired, and that paragraph 6 of the settlement agreement did not prohibit him from using Phyllis Consulting as an intermediary.
Defendant insisted that Eden paid Phyllis Consulting for plaintiff’s services and so there was no basis to find that plaintiff was working for Eden at the time her father retired, which eviscerated a condition precedent to the agreement. She added that there was no evidence that Phyllis Consulting was the intended beneficiary of the agreement. And she argued that plaintiff was merely acting as an agent of the corporate entity, Phyllis Consulting.
The motion court granted the motion. On appeal, the First Department unanimously reversed, on the law, and the denied the motion.
The Court found that plaintiff was employed by Eden:
In support of her motion to dismiss, Amy contends that plaintiff was not “employed by” Eden Wood on the date of Richard’s retirement because Eden Wood did not pay him at all but instead paid his consulting company. At the time of the Settlement Agreement, plaintiff was president of Eden Wood, and with Richard’s knowledge, he was being paid through the corporation he created. Plaintiff’s position as president and the payment arrangement continued after the Agreement was signed and through the time that Richard retired. Accordingly, notwithstanding this arrangement, plaintiff adequately alleges that he was, and remained for all intents and purposes, an employee of Eden Wood at the time of Richard’s retirement.1
The Court explained that:
The court’s interpretation of the contract to require any claim to be made by plaintiff’s consulting company, rather than plaintiff individually, would render the words of the agreement meaningless. Under the circumstances, the undefined term “employ” is subject to ambiguity. Accordingly, it is appropriate to examine the facts and circumstances to determine the intent of the parties. Moreover, interpreting the contract as imposing a requirement that plaintiff must be directly employed by Eden Wood as a condition precedent to recovery would elevate form over substance. The Settlement Agreement did not include any language supporting that reading.2
Finally, regarding the third-party beneficiary claim, the Court held that “the prominent mention of plaintiff in paragraph 6 of the Settlement Agreement evince[d] the contracting parties’ intent to benefit him.”3 In reaching this conclusion, the Court relied on LaSalle Natl. Bank v. Ernst & Young, 285 A.D.2d 101 (1st Dept. 2001). In LaSalle, the court discussed the law concerning third-party beneficiaries as follows:
In order to claim third-party benefits, the putative third-party beneficiary will be deemed 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 [not relevant here]; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. * * * An incidental beneficiary * * * is not an intended beneficiary”. A non-party may sue for breach of contract only if it is an intended, and not a mere incidental, beneficiary, and even then, even if not mentioned as a party to the contract, the parties’ intent to benefit the third party must be apparent from the face of the contract. Absent clear contractual language evincing such intent, New York courts have demonstrated a reluctance to interpret circumstances to construe such an intent.4
Accordingly, the Court concluded that plaintiff was entitled to assert a cause of action for breach of contract as a third-party beneficiary.5
- Slip Op. at *1.
- Id. (citations omitted).
- Id. at *1-*2 (citation omitted).
- LaSalle, 285 A.D.2d at 108-109.
- Slip Op. at *2.
Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.