A simple contract involves two parties. For example, John agrees to sell Mary a lawn mower for $50. But many contracts often implicate third parties. So let's say John hires Mary to mow his lawn for $50; she, in turn, subcontracts the actual mowing to Bob for $40. Does this make Bob a party to John and Mary's original contract? Put another way, if Bob mows the lawn, and John fails to pay Mary the $50, can Bob then sue John for breach of contract?
As explained by the New York courts, a “third-party beneficiary” may bring a breach of contract lawsuit if he can establish three things. First, there must be a valid and binding contract between the other parties. Second, the contract was “intended to benefit” the third party. Finally, the benefit is “sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate [the third party] if the benefit is lost.” The key here is the third party must be an intended beneficiary, rather than an incidental beneficiary.
So in the above hypothetical, Bob could not sue John for breach of contract, because Bob was not the intended beneficiary of John's contract with Mary. Bob was merely an incidental beneficiary. Now, if John had paid Mary $50 to deliver her lawn mower to Bob—so he could then mow John's lawn—and she failed to do so, then Bob could sue Mary for breach of contract, as he was the “intended beneficiary” of the contract.
Board of Education v. Long Island Power Authority
Let's consider a recent real-world example involving something bigger than mowing a lawn. In 1997, the Long Island Power Authority (LIPA), a state agency, signed a contract to acquire the Long Island Lighting Company (LILCO), then the provider of electricity for Nassau and Suffolk Counties. Under the contract LILCO—and subsequently LIPA—agreed to drop any current tax certiorari cases. Tax certiorari refers to the legal process of challenging a municipality's property tax assessments. In Suffolk County, for instance, individual towns conduct these assessments.
As then-LIPA Chairman Richard Kessel explained to Town of Huntington Supervisor Frank Petrone in August 1997, LILCO and LIPA agreed to drop “all pending certiorari proceedings against the Town of Huntington.” And going forward, LIPA would not challenge the Huntington's tax assessments against former LILCO property—specifically, a power-generating facility located near the Village of Northport—unless the town proposed a “disproportionate” increase in said assessments.
Thirteen years later, however, LIPA did file a tax certiorari challenge to Huntington's reassessment of the Northport power facility. This prompted a lawsuit by the Northport-East Northport school district, which relies upon property taxes to support its budget. The school district argued LIPA breached its original contract with LILCO by challenging Huntington's assessment. Any potential reduction in the assessment would subsequently injure the school district, as it would receive less in property taxes. LIPA argued the school district lacked standing to sue as it was not a party to the original contract, and in any case the Town of Huntington, not the district, would be liable for any tax refund owed.
In May 2013, Judge Elizabeth M. Emerson of Suffolk County Supreme Court denied LIPA's motion to dismiss. She held there remained a viable issue as to whether the school district was an “intended beneficiary” of the 1997 contract. She noted the school district presented evidence that the tax certiorari provision was included in the contract specifically to protect the interests of local school districts. Furthermore, as the Appellate Division noted in a July 29 order affirming Judge Emerson's decision, nothing in the contract expressly forbids third parties from seeking to enforce the provision. The school district could therefore proceed with its lawsuit.
Not every third party has the right to sue to enforce a contract. But if you are unsure about your rights, it is critical you seek advice from an experienced New York civil litigation attorney. Contact our offices if you would like to speak with someone right away.