Third-Party Beneficiary and Contracts with Architects–Captiva Lake Investments, LLC v. AmeriStructure, Inc.

In Captiva Lake Investments, LLC v. AmeriStructure, Inc., 2014 WL 1227739 (Mo. App., E.D.), we have a client (MPDC) that engaged a firm (KCI, whom we’ll call the prime), in which the prime agreed to provide design and construction services (a design-build contract). The prime engaged a firm (AmeriStructure, whom we’ll call sub) to provide architectural services. The client obtained financing and subsequently defaulted. The clients’ rights under various pertinent contracts allegedly became owned by plaintiff, one Captiva.

The case raises interesting issues about the economic loss rule. We will put those aside for now. The aspect of interest is whether the plaintiff, now standing in the shoes of the initial client, is permitted to maintain a breach of contract claim against the sub for alleged violation of the sub’s agreement with the prime. Here’s the part of the brief for the sub addressing third-party beneficiary status:

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1. Plaintiffs Lack of Privity of Contract with AmeriStructure

The same argument made supra, regarding lack of privity, applies here. Missouri law does not recognize a direct cause of action, in contract by a project owner, such as MPDC, against a subcontractor, such as AmeriStructure. See Grgic v. Cochran, 689 S.W.2d at 690; East v. Galebridge Custom Builders, Inc., 839 S.W.2d at 722. In Grgic, this Court explained that a subcontractor has no contract with owners and there is no privity between them. Grgic v. Cochran, 689 S.W.2d at 690. Therefore, the owners could not sue subcontractor directly for breach of contract. Id. In East v. Galebridge, this court also held that the owner does not qualify as a third party beneficiary. East, 839 S.W.2d at 722.

Further, the Construction Loan Agreement between MPDC and National City (as “Lender”), provided that National City disclaimed any privity of contract between the Lender (i.e. National City) and AmeriStructure/Sacco. The applicable clause states as follows:

“14.4. Disclaimer by Lender…Lender shall not be deemed to be in privity of contract with any Contractor, Subcontractor, Architect or provider of services on or to the Premises….”

(S.L.F. 137).

Plaintiffs do not allege any facts showing that they had any direct contractual relationship with AmeriStructure. Neither MPDC, nor National City were in direct contractual relationship with AmeriStructure. As such, Plaintiffs are not allowed to “stand in the shoes” of KCI, nor were any rights assigned that entitle Captiva to “stand in the shoes” of KCI, the only party in privity of contract with AmeriStructure, and recover for a fabricated breach of contract.

Missouri’s Odd Authority: Conflating Aiding a Breach with Third-Party Beneficiary Status; Relying on Inapposite Authority and Suggesting Elimination of Third-Party Beneficiary Status

There is, frankly, some conclusory authority in Missouri that is anomalously hostile to third-party beneficiary claims. In fact, it appears completely to eliminate that as a basis for liability. So, the “analysis” in East v. Galebridge, cited in the brief, is the following:

In Grgic v. Cochran, 689 S.W.2d 687 (Mo.App.1985), owners contracted with WECO Enterprises, Inc. (“original contractor”) to build a house. Dissatisfied, the owners sued subcontractor, by way of counterclaim. Owners alleged that they were third-party beneficiaries of the contract between original contractor and subcontractor, and that they were suing for damages for the breach thereof. The trial court dismissed the owners’ claim for lack of privity.

In that case, we held that the dismissal was proper. We stated:

Subcontractor had no contract with owners and there was no privity of contract between them. Rackers and Baclesse, Inc. v. Kinstler, 497 S.W.2d 549, 553 (Mo.App.1973). Owners, therefor, [sic] could not sue subcontractor directly for breach of contract, which was the real basis of these counts. Owners’ remedy is to sue the original contractor or his trustees on their contract. Kahn v. Prahl, 414 S.W.2d 269, 277–78[2, 3] (Mo.1967). There is no duty owed to owners by subcontractor in the absence of privity of contract. See H.R. Moch Co. v. Rensselaer Water Co., 247 N.Y. 160, 159 N.E. 896 (1928).

Id. at 690.

The authority that “[t]here is no duty owed to owners by subcontractor” is completely inapposite.  H.R. Moch involves a claim by which a private party sought to remedy for fire damage against a firm that had agreed with a municipality to supply water. Municipal contracts create different issues (Murray on Contracts § 133 describes them as one of the “clusters of cases that manifest unusual issues”) and are inapposite. A primary reason for that kind of outcome is allowing third parties to sue would substantially increase the scope of potential liability for breach, and one supposes that is not a duty the promisor water company intended to assume. And even that authority has been long-ago limited in New York itself:

To be distinguished are our holdings in Moch Co. v. Rensselaer Water Co., 247 N.Y. 160, 159 N.E. 896 [contract between water company and city to supply water for fire hydrants did not create a duty to member of the public] and Kornblut v. Chevron Oil Co., 62 A.D.2d 831, 407 N.Y.S.2d 498, affd. on opn. below 48 N.Y.2d 853, 424 N.Y.S.2d 429, 400 N.E.2d 368 [contract with Thruway Authority to provide repair services did not create duty to members of the public]. In neither of those cases did the operative contract provide that the service was to be rendered other than for the contracting party, city or authority. Moreover, in Moch we noted the distinction between the agreement of the water company, there in issue, to furnish water at the hydrants and the agreement of the water company to provide direct service to members of the public at their homes and factories (247 NY, at pp. 164, 166, 159 N.E. 896). In the present instance, the purpose of the enabling legislation was expressly stated to be “To preserve reliability of electric service in the metropolitan area of the city of New York” (Public Authorities Law, § 1001–a, subd. 1), and the service agreement contained the express obligation to “operate and maintain all the facilities necessary to deliver power to Astoria-Indian Point Customers [which included plaintiffs] in accordance with good utility operating practice”. Indeed, the essence of the responsibility of a public utility is to provide services to the consuming public.

Koch v. Consolidated Edison Co. of New York, Inc., 468 N.E.2d 1 (N.Y. 1984).

So, a Missouri case from 1967 seems to reach a consistent result. Kahn v. Prahl, 414 S.W.2d 269 (Mo. 1967):

Perhaps it may be said that Wabash did, in effect, contract to perform the drilling and belling operations for plaintiff’s building; nevertheless, the evidence does not show any contract between Wabash and plaintiff, Wabash was not a party to the general contract between plaintiff and Prahl, and plaintiff was not a party to the subcontract between Prahl and Wabash. Under such circumstances, third-party defendant Fairell (formerly Wabash) was not ‘directly responsible to plaintiff,’ for any breach by Prahl of his general contract with plaintiff or for any breach of its own subcontract with Prahl, because one not a party to a contract is not bound thereby and is not liable for breach of a contract to which he is not a party. Mueninghaus v. James, 324 Mo. 767, 24 S.W.2d 1017, 1020(4); Zweifel v. Lee-Schermen Realty Co., Mo.App., 173 S.W.2d 690, 700(4, 5); 17A C.J.S. Contracts p. 998, s 520.

The authority relied-upon addresses whether a person not a party can be liable for breach (inapposite) or suggests third-party beneficiary claims are simply unavailable in Missouri.
Zweifel v. Lee-Schermen Realty Co., 173 S.W.2d 690 (Mo. App. 1943) states:

No cause of action is stated against appellant Arthur J. Lee for the simple reason that the allegations in the petition do not show that he was a party to the contract. Mueninghaus v. James, 324 Mo. 767, 24 S.W.2d 1017; 17 C.J.S., Contracts, p. 1143, § 520. Persons not bound by a contract are not liable for damages on the breach, although they may have aided or abetted the party in its violation. 13 C.J. 713. Therefore, the Court erred in not giving and reading to the jury the requested instruction in the nature of a demurrer to the evidence as to appellant Arthur J. Lee.

Mueninghaus v. James, 24 S.W.2d 1017 (Mo. 1930), involves a property owner’s (promisor’s) failure to sign, as had been agreed, an odious covenant restricting ownership on the basis of race. The court, inter alia, refuses to hold the subsequent buyer liable for her seller’s alleged breach:

Another peculiar situation arises here. Julia P. James, defendant, is not a party to any contract. She is not bound by any contract, and the allegations of the petition show that the title to the property involved is vested in her. The plaintiffs have no cause of action against her merely because she knew that Joseph Frank Haddock had agreed to sign a contract, but had not signed it, by which he was to agree not to vest her with title to the property.

That analysis, of course, has nothing to do with whether a third party can enforce another’s promise. It rather addresses whether a non-party can be liable for a party’s breach.

A Proper Analysis

So, we can now see that the origins of the analysis the sub cites. It is generally conclusory, in part inapposite and generally much more hostile to third-party beneficiary claims than a modern approach would be.  One can see the modern breadth of third-party beneficiary status in An interesting modern discussion of third-party beneficiary status in connnection with an organ donation, provided by Colavito v. New York Organ Donor Network, Inc., 438 F.3d 214 (2d Cir. 2006):

We disagree with the district court’s statement that even if a donor has enforceable rights, an intended donee would not have standing to enforce them. See Colavito, 356 F. Supp. 2d at 246. If New York Public Health Law does provide donors with enforceable rights, we see no reason why those rights could not also be enforced by intended third-party beneficiaries. “New York follows the nearly universal rule that a third person may, in his own right and name, enforce a promise made for his benefit even though he is a stranger both to the contract and to the consideration. . . . There is need for neither consideration from, nor privity with, nor obligation to, the third person.” N.Y. Jur. Contracts § 302. The New York Court of Appeals has adopted the Restatement’s distinction between intended and incidental beneficiaries and explained that “essential to status as an intended beneficiary . . . is either that ‘performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary’ or that ‘the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.'” Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 66 N.Y.2d 38, 44, 485 N.E.2d 208, 212, 495 N.Y.S.2d 1, 5 (1985) (quoting Restatement (Second) of Contracts § 302(2)). It seems clear that the consent form directing a donation to Colavito would meet this standard.

Murray on Contracts § 133 asserts the following:

While there have been a few cases recognizing the owner as a third party beneficiary of contracts between the general contractor and subcontractors, the better and apparently prevailing view is that owners are not intended beneficiaries of such contracts unless the parties have otherwise agreed.

The Murray text does not illuminate why it is the better view that the client cannot be a third-party beneficiary are not illuminated.

In the case at hand, it is not particularly thoughtful to claim something should be the outcome merely because that happens in a majority of the other cases. A reason would be helpful.

The existence of third-party beneficiary status is a question of the intent of the parties. At least as far back as Taylor v. Caldwell (1863), courts have referenced what we would now describe as the “hypothetical bargain” in ascertaining the meaning of contractual obligations. Let us imagine a hypothetical three-party bargain. A client, the prime and the sub are all in a room. They are discussing whether the sub should be hired. The sub proposes that if it violates a required standard of conduct, it should not be responsible for any injury arising to client.

So, do we think the client would now feel warm and fuzzy about the proposed engagement of sub? Put yourself in the position of one representing the sub. What plausible basis can you articulate so that, if the sub violates the contractual duties and injury accrues to client, the sub should avoid all liability? That’s an exercise that would tax the creativity of most.

A final point. We have something formerly called the doctrine of practical construction, under which the parties’ acts inform the understanding of the contract. So, as it turns out, the sub in the case consented to an assignment of rights to its performance to the client’s lender (albeit erroneously referencing the parties to its own contract). The sub’s brief seems to dismiss this factor. But why, then, was the sub consenting to the assignment had it not thought that some obligation would be owed to a third party?