“A third-party beneficiary … is a person or entity that receives benefits from a contract between two other parties, even though they are not a party to the contract.”[1] The concept of a third-party beneficiary stems from the notion that “it is just and practical to permit the person for whose benefit the contract is made to enforce it against one whose duty it is to pay” or perform.[2]

“[A] party asserting rights as a third-party beneficiary must establish (1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for its benefit and (3) that the benefit to it is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate it if the benefit is lost.”[3] A third party’s right to enforce a contract arises “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.”[4]

A non-party may sue for breach of contract only if it is an intended, and not a mere incidental, beneficiary,[5] “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.”[6] Absent clear contractual language evincing such intent, New York courts have demonstrated a reluctance to interpret circumstances to construe such intent.[7]

[Eds. Note: This Blog examined the rights of third-party beneficiaries here and here.]

In Powerflex Solar, LLC v. Solar PV Pros, LLC, 2024 N.Y. Slip Op. 04102 (3d Dept. Aug. 1, 2024) (here), the Appellate Division, Third Department considered the foregoing principles in affirming the dismissal of plaintiff’s cause of action for breach of contract as a third-party beneficiary.

Powerflex arose from purchase order agreements to deliver solar modules to three project sites being developed by plaintiff. One site was in New York, another in Rhode Island and the third in California. Defendant Solar PV Pros, LLC (“SPVP”) subcontracted with defendant Meitus Energy Services, LLC (“Meitus”), who in turn subcontracted with defendant EoS Organization, LLC (“EoS”), to supply the solar modules, with EoS to ship them directly to plaintiff’s project sites in the respective three states. Plaintiff maintained that Meitus and EoS intended to provide components to enable the performance of plaintiff’s agreements with SPVP and intended for the benefit of the Meitus-EoS agreements (e.g., the subcontracts) to redound to plaintiff, making it a third-party beneficiary of the Meitus-EoS agreements.

In July 2022, plaintiff filed a complaint alleging breach of contract against SPVP, unjust enrichment against all defendants, breach of contract as a third-party beneficiary against EoS and Meitus and conversion against all defendants.

EoS filed a pre-answer motion to dismiss, arguing that, among other things, plaintiff failed to state claims for breach of contract as a third-party beneficiary. The motion court granted the motion, finding that, inter alia, plaintiff had failed to state a claim against EoS for breach of contract as a third-party beneficiary.

Plaintiff moved for reargument, and, upon granting reargument, the motion court adhered to its original decision. Plaintiff appealed from both orders.

The Court affirmed the dismissal of plaintiff’s breach of contract claim, holding that plaintiff was “not a third-party beneficiary of the agreements between Meitus and EoS.”[8]

The Court found that plaintiff failed “to plead any facts that would establish that the agreements were intended for its benefit and that any benefit to it was more than incidental.”[9] The Court noted that plaintiff was not mentioned in the agreements between EoS and Meitus, and that EoS was unaware that plaintiff was the intended ultimate purchaser of the product.[10] The Court explained that although EoS was aware that the product was going to be resold from Meitus to SPVP, it had no knowledge that SPVP intended to sell the product to plaintiff.[11]

Compounding the problem for plaintiff, noted the Court, was the fact neither EoS nor Meitus could assign, sell, or mortgage its interests or rights under the agreement without providing prior written notice.[12] A merger clause, which provided that the purchase agreements and purchase orders represented the entire agreement between the parties, further confirmed that plaintiff was not intended to be a beneficiary of the agreements.[13] “Moreover,” said the Court, “there [was] no indication from the language of the agreements that EoS intended to benefit plaintiff, and the benefit plaintiff complain[ed] of losing, the solar modules, would have come from the performance of its agreement with SPVP, but for its breach.”[14] “As such,” concluded the Court, “any benefit plaintiff might have received from the EoS-Meitus agreement would have been incidental.”[15]

Therefore, the Court affirmed the dismissal of the claim, stating that the motion court “properly determined that plaintiff failed to state a cause of action for breach as a third-party beneficiary of the agreements between EoS and Meitus.”[16]

Takeaway

The determination of whether a person is a third-party beneficiary of a contract raises questions about the person’s right to enforce an agreement to which he or she was not a party. As discussed, a third party’s right to enforce a contract arises “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.”[17] When intent is at issue, as in Powerflex, the contracting parties must clearly intend to benefit the third-party. Thus, where the contract shows that the parties intended to confer a direct benefit upon a third party, not a mere incidental one, the third party may maintain an action for breach of contract. In Powerflex, plaintiff could not make this showing.

[1] Investopedia, “Third-Party Beneficiary: Meaning and Rights” (June 30, 2022) (here).

[2]  Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 66 N.Y.2d 38, 44 (1985).

[3] Greg Beeche, Logistics, LLC v. Cross Country Constr., LLC, 210 A.D.3d 1158, 1159-1160 (3d Dept. 2022) (internal quotation marks, brackets and citations omitted), lv. denied, 40 N.Y.3d 902 (2023); Luckow v. RBG Design-Build, Inc., 156 A.D.3d 1289, 1291 (3d Dept. 2017).

[4] Dormitory Auth. of the State of N.Y. v. Samson Constr. Co., 30 N.Y.3d 704, 710 (2018) (internal quotation marks and citation omitted); Merlino v. Knudson, 214 A.D.3d 642, 644 (2d Dept. 2023).

[5] Alicea v. City of New York, 145 A.D.2d 315, 317 (1st Dept. 1988); LaSalle Natl. Bank v. Ernst & Young, 285 A.D.2d 101 (1st Dept. 2001).

[6] LaSalle Natl. Bank, 285 A.D.2d at 108 (citations omitted).

[7] Id. at 109 (citing Fourth Ocean Putnam, 66 N.Y.2d at 44).

[8] Slip Op. at *3.

[9] Id. at *4.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id. at *4-*5.

[16] Id. at *5 (citations omitted).

[17] Dormitory Auth., 30 N.Y.3d at 710.