The Role of Third Party Beneficiaries in Breach

In The Matter of White Plains Plaza Realty, LLC and Capelli Enterprises the Appellate Division of the Supreme Court of New York, second department heard an appeal by Capelli Enterprises, Inc (CEI) against the entry of a judgment against it and in favor of White Plains Plaza (WPP). The case had a complex procedural history, involving the breach of a commercial lease and an indemnification agreement.

Background of the Case

In 2009 petitioner WPP obtained a judgment against a company not party to this litigation known as TSI White Plains (TSIWP) for the breach of a commercial lease agreement – this judgment was for over six hundred thousand dollars. TSIWP had a parent company, known simply as TSI, that agreed to cover four hundred thousand dollars worth of the judgment. TSI itself had a contract, known as an indemnification agreement, with CEI, wherein CEI agreed to reimburse TSI for the money paid out.

All was well and good until WPP went back to court and sought additional damages from TSIWP, which the court awarded. These additional damages were never paid, by neither TSIWP nor its parent company TSI, and so WPP brought the current case.

WPP’s Theory and CEI’s Response

WPP sued CEI based on the following theory. WPP stated, in their petition, that CEI, because of the indemnification agreement it had with TSIWP, was ‘indebted’ to TSIWP. It’s a common legal principle that if Party C owes money to Party B and Party B owes money to Party A, then A may sue C for the money that C owes to B – it is sometimes a feasible way to recover money from a party that has no money. WPP sought to use this principle, however CEI pointed out a potential flaw in this argument.

CEI protested that TSIWP was not a party to the agreement (for indemnification) between CEI and TSI (the parent company). Because there was no actual direct agreement or obligation to pay between CEI and TSIWP, WPP had no business suing CEI!

Judicial Reasoning: 3rd Party Beneficiaries

The appellate division agreed with the lower court and rejected CEI’s argument under the doctrine of intended 3rd party beneficiaries. The court actually agreed that TSIWP was not a direct party to the agreement, however it was an intended 3rd party beneficiary, and thus ‘dragging in’ CEI to the lawsuit was proper.

The court articulated the three-factor test for determining a 3rd party beneficiary.

(1) There must be a valid and binding contract between two parties – there was one in this case between CEI and TSI (the parent company).

(2) The contract was intended for the benefit of the 3rd party – here TSIWP benefitted from the agreement because TSI paid for the breach of lease and CEI had an obligation to reimburse TSI for the monies paid.

(3) The benefit to the 3rd party was immediate enough, rather than incidental or tangential, to indicate that the contracting parties assumed a duty to compensate the 3rd party if the intended benefit was lost. Here language in the indemnification agreement specifically requires CEI to compensate TSI for various bad things TSIWP may do and it also requires CEI to undergo additional duties to TSIWP – assuming certain obligations that TSIWP owed to WPP under the commercial lease.

Thus, all three elements of the test were met, and TSIWP was an intended 3rd party beneficiary of the agreement. As previously discussed, joining CEI into the dispute was a proper course of action by WPP.

The doctrine of 3rd party beneficiaries is a tricky one that can have unintended consequences. It is imperative to hire competent counsel who have experience with the subtleties of this branch of breach of contract law. Please do not hesitate to contact our office for a consultation.