Monday, July 22, 2013

Contracts - 3d party beneficiary

McGaffic v. City of New Castle – Cmwlth. Court – July 22, 2013


Third-Party Beneficiary Law in Pennsylvania

The general rule is that a contract must express an intention to confer standing on a third-party beneficiary. Scarpitti v. Weborg, 530 Pa. 366, 370, 609 A.2d 147, 149 (1992). In Marsteller Community Water Authority v. P.J. Lehman Engineers, 605 A.2d 413 (Pa. Super. 1992), for example, it was held that a contract between a redevelopment authority and an engineering firm to upgrade a water system owned by a water authority expressed an intention to make the water authority a third-party beneficiary of the contract.9

9 What constitutes an “express intention” varies. In Johnson v. Pennsylvania National Insurance Companies, 527 Pa. 504, 594 A.2d 296 (1991), our Supreme Court held that a taxicab passenger was an intended third-party beneficiary of the taxicab owner’s insurance policy and, thus, bound by the policy’s requirement to arbitrate a claim for uninsured motorist benefits. Id. at 508, 594 A.2d at 298. The taxicab passenger was not named in the policy nor a party to the contract. In Keefer v. Lombardi, 376 Pa. 367, 102 A.2d 695 (1954), our Supreme Court found unnamed citizens and property owners to be third-party beneficiaries of a contract between a municipality and a contractor by which the contractor assumed liability for any damages caused by the construction. Id. at 369-70, 102 A.2d at 696. The Supreme Court found that “the drafters of the contract … include[d] as beneficiaries the inhabitants of the city for which they acted.” Id. at 372, 102 A.2d at 698. An express intention to create third-party beneficiaries does not require, even in the context of a government contract, that the beneficiaries be specifically named.

In Guy v. Liederbach, 501 Pa. 47, 59-60, 459 A.2d 744, 751 (1983), our Supreme Court adopted Section 302 of the Restatement (Second) of Contracts (1979), which allows a third-party to enforce a contractual promise even though the contract does not explicitly express that intention. Section 302 states:

Intended and Incidental Beneficiaries
(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is 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; or

(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.

(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary. 10
RESTATEMENT (SECOND) OF CONTRACTS §302 (1979) (emphasis added).

Our Supreme Court has explained that under Section 302 a party becomes a third party beneficiary only where ... the circumstances are so compelling that recognition of the beneficiary’s right is appropriate to effectuate the intention of the parties, and the performance satisfies an obligation of the promisee to pay money to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance....  Scarpitti, 530 Pa. at 372-73, 609 A.2d at 150-51 (emphasis added) (citations omitted). Stated otherwise, the “compelling circumstances,” or first prong, “sets forth a standing requirement,” and the second prong defines the type of claim to be presented by a third-party beneficiary. Id. at 371, 609 A.2d at 150. Notably, the named promisee’s inability or lack of incentive to enforce a contractual promise will support the third-party’s standing to enforce the promise. Id.

In sum, whether a contract contemplates enforcement by third-parties is a matter of contract construction. Parties may explicitly state that a contract provision is intended to create third-party beneficiary rights and identify, by name, the holder of those rights. Parties may explicitly state that a contract is not intended to create third-party beneficiary rights or identify the specific persons who do not hold these rights, as noted in Section 302(1) of the Restatement (Second) of Contracts. Most contracts are not explicit, and in that case the principles set forth in Section 302 are employed to ascertain the intention of the parties.

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