Divided New York Court of Appeals Holds That a Third Party Cannot Sue for Breach of Contract Absent Express Language Naming Them as an Intended Beneficiary and That Claims for Breach of Contract and Professional Negligence Against an Architect Cannot Both Be Maintained When the Allegations Supporting Both Claims Are Nearly Identical

Dormitory Auth. of the State of NY v. Samson Constr. Co., 2018 N.Y. Lexis 218 (February 15, 2018)

The Dormitory Authority of the State of New York (“DASNY”) undertook, as project manager, to construct a facility for the Office of the Chief Medical Examiner of the City of New York (the “City”) as a forensic biology laboratory (the “Project”).  DASNY retained Perkins Eastman Architects, P.C. (“Perkins”) as architect for the Project, and Samson Construction Co. (“Samson”) as the foundation contractor.

Complications during the construction of the foundation resulted in 18 months of delays due to the adjacent building settling eight inches, damages to the adjacent sidewalks, utilities and emergency repairs.  DASNY and the City filed suit against Samson, and later joined Perkins, asserting claims against Perkins for breach of contract and negligence.

Perkins moved for summary judgment to dismiss the City’s claims, and to dismiss DASNY’s negligence claim as duplicative of its breach of contract claim.  The trial court dismissed the City’s breach of contract claim; holding that the City was not an intended third-party beneficiary of the contract between DASNY and Perkins (the “Contract”), and allowed both DASNY’s breach of contract and negligence claims to proceed, holding that the claims were not duplicative of each another.

The Appellate Division reinstated the City’s breach of contract claim, holding that the City had raised an issue of fact as to whether it was an intended third-party beneficiary of the Contract.

A split Court of Appeals reversed and modified.

In dismissing the City’s claim against Perkins for breach of contract, the Court of Appeals explained that a third party may only sue as a beneficiary on a contract where it is clear that the contracting parties intended to benefit the third party.  If such an intent is not shown, the third party is merely an incidental beneficiary and cannot enforce the contract.

Justice Rivera, in dissent, argued that, under New York law, a party that is “not a stranger to the contract” and “whose relationship with the defendant is the functional equivalent of privity” may assert a breach.  Justice Rivera stated that an issue of fact existed as to whether the City could assert a breach of the Contract because the Contract expressly stated that the Project would be operated by a city agency, required Perkins to name the City as an additional insured on its general liability insurance policy and the City retained control over various aspects of the Project, including approving the design and budget, and selecting contractors.

The majority, however, held that construction contracts must generally contain express language that the third party is an intended beneficiary of the contract, reasoning: “[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.”  The majority noted that the City was not without recourse, as DASNY could bring a claim for breach of contract.  Also telling of the parties’ intent, according to the majority, was the fact that the contract between DASNY and Samson expressly reserved third-party enforcement rights to the City, whereas the Contract between DASNY and Perkins did not.

The majority dismissed the claim by DASNY against Perkins for professional negligence, as duplicative of DASNY’s claim for breach of contract.  The majority held that the professional negligence claim was identical in nearly every respect to the contract claim, and noted that the Complaint did not allege an injury that was not already encompassed in the contract claim.

The majority recognized that a claim for professional negligence can stand in addition to a contract claim when there is a breach of a legal duty independent of the contract, specifically, where the harm alleged is an abrupt, cataclysmic occurrence not contemplated by the contracting parties.  In contrast, the damages alleged (i.e., the cost to complete the Project and the costs to repair the damage to adjacent structures) were within the contemplation of the parties under the Contract and expressly addressed in the Contract, so DASNY was essentially seeking enforcement of its contract rights in its professional negligence claim.

In dissent, Justice Wilson distinguished between a claim for professional negligence and one for ordinary negligence, arguing that professionals have an independent duty to meet professional standards of care, regardless of any contractual duties, and, while DASNY could not recover for the same damages twice, DASNY should be free to pursue both theories to judgment without reference to the public interest/catastrophic consequences test.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Emily D. Anderson

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