By: Thomas S. Tripodianos Published: January 2013

Third Party Beneficiary Theory

Question. Contractor executed a homeowner/contractor agreement with Homeowner for renovations to her property, to be financed by a loan provided by Bank. The loan was the subject of a rehabilitation loan agreement, executed by Homeowner and Bank. Can the Contractor sue the Bank for the work it completed on Homeowner's home under the theory that it has benefitted Bank by increasing the home's value..?

Answer. YES, under a third party beneficiary theory. The Contractor executed a Homeowner/Contractor Agreement with Homeowner for renovations to Homeowner's property, to be financed by a loan provided by the Bank. The loan was the subject of a Rehabilitation Loan Agreement, (hereinafter the "Agreement "), executed by Homeowner and Bank.

Since the Contractor is not a party to this contract, and it did not sign any other contract with the Contractor, a breach of contract claim against Bank cannot stand. However, the Contractor does not argue that it has contracted directly with Bank, but that it is a third party beneficiary to the Agreement. It is sufficient to state here that the absence of a party's name in a contract does not preclude a claim that the contract bestows a benefit upon him and that he is, therefore, a third party beneficiary of that contract.

In order to succeed on a claim that one is a third party beneficiary of a contract, it must be shown that a recognition in the right of performance in the Contractor is appropriate to effectuate the intention of the parties and the performance of the promise will satisfy an obligation of the Bank to pay money to the Contractor or the circumstances indicate that the Bank intends to give the Contractor the benefit of the promised performance. The Contractor must also show that the contract was intended to provide him with a benefit which was sufficiently immediate, rather than incidental, to support the assumption that Contractor would be entitled to compensation if the benefit was lost. The best evidence of the intent to grant a benefit to a third party, is the language of the contract itself.

The Agreement states that the "Lender [Bank] shall release the escrowed funds by check, payable to the Borrower [Homeowner] and/or the contractor [Contractor] or other appropriate payee who performed the work and supplied the materials in connection with this Agreement..." Surely, the performance of Bank's promise to release the funds to Homeowner, will help to ensure that Homeowner will satisfy her obligation to pay the contractor (beneficiary). Importantly, it will effectuate the intention of the parties to the Agreement, which is to have Homeowner's home rehabilitated with the funds provided by Bank. This intention could not be accomplished unless Contractor completed the work in Homeowner's home. Indeed, Bank recognized this when it associated Contractor to the Agreement by requiring the Contractor to sign a "Notice To Contractor", written on Bank letterhead, which specified how Bank expected the Contractor to perform the work on Homeowner's home, and how Contractor would be paid by Bank. And the Contractor clearly stands in the position of one to whom the Agreement grants a benefit sufficiently immediate, so that it can reasonably be assumed, it would be entitled to compensation if the benefit under the Agreement was lost.

The Contractor also makes an unjust enrichment claim, theorizing that the work which it completed on Homeowner's home has benefitted Bank by increasing the value of the home in which Bank holds a mortgage. This claim lacks merit inasmuch as it is a quasi-contractual remedy, and it has been held that when there is a valid and enforceable written contract governing the disputed subject matter, it precludes claims in quasi-contract. The prohibition of quasi-contractual claims where a written contract exists, applies to non-contracting parties as well.

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