Recent Contract Law Decisions From the Second Department
In recent months, the Second Department issued a number of opinions on contract law. As discussed below, the court addressed what is necessary to prosecute a claim as a third-party beneficiary of a contract, when unsigned documents could be given binding effect and other topics.
The Second Department issued two decisions concerning the ability of a non-signatory to a contract to enforce the contract as a third-party beneficiary. The cases show that in order to proceed with a third-party beneficiary claim, the claiming party must set forth facts from which it could be concluded that the parties to the contract intended to confer a benefit upon it.
In the first decision, Nanomedicon v. Research Foundation of State University of New York,1 a faculty member at State University of New York (SUNY) was the inventor listed on certain patents. These patents came to be owned by an affiliate of SUNY which licensed them. Nanomedicon LLC held a license. In litigation concerning the license, the faculty member contended she was a third-party beneficiary of the license. She asserted a claim to have the license declared null and void. The trial court dismissed this claim, and the faculty member appealed.
The Second Department affirmed the dismissal. It stated that an examination of the license demonstrated that the parties did not intend the license to benefit the faculty member. The license contained no language evidencing that the parties intended to benefit the inventor. No evidence had been presented from which such intent could be found. Accordingly, the court believed the faculty member lacked standing to assert a third-party claim. The language in the decision could leave the impression that if the four corners of the contract did not reveal an intention to confer a benefit upon the third party, a complaint by the third party would fail as a matter of law. That impression, however, would be mistaken.
A week earlier, in Encore Lake Gove Homeowners Association v. Cashin Associates,2 the Second Department had noted that the intent to benefit the third party did not need to appear from the face of the contract. In that case, defendant had been hired by the Incorporated Village of Lake Grove as its village engineer. Plaintiff homeowners association contended it was a third-party beneficiary of that contract and asserted a breach of contract claim against the engineer. The Supreme Court granted a motion to dismiss that claim. The Second Department modified the ruling to let the third-party beneficiary claim proceed.
The Second Department ruled that in determining third-party beneficiary status, it is permissible for the court to look beyond the wording of the particular contract and consider the circumstances surrounding the contract. The court believed that it was "well settled that the obligation to perform to the third-party beneficiary need not be expressly stated in the contract." The court noted that third-party beneficiary status could exist without the identity of the third party being set forth in the contract, or even known, at the time of contract formation.
The court in the Encore Lake Grove Homeowners case believed the key factor concerning third-party beneficiary status was whether the contract parties intended that their agreement benefit the party claiming the status. The court believed that the homeowners association had shown such intent by submitting an affidavit from the village attorney attesting that the village engaged the defendant engineer to perform services that would benefit persons such as the members of the homeowners association.
The two cases discussed above illustrate that a party asserting third-party beneficiary status must show either (i) the language in the contract where the parties expressed an intention to benefit the claimed third-party beneficiary or (ii) other evidence of such intent. In the Nanomedicon case, no such showing had been made. In Nanomedicon, the language of the contract did not reflect an intent to benefit the third party. There was no factual allegation in the claim or evidence presented that SUNY and the licensee intended that patent license benefit the third-party faculty member. Accordingly, the third-party beneficiary claim failed. In contrast, in the Encore Lake Grove case, the plaintiff presented evidence that it fell within the class of persons whom the contract parties intended to benefit. Accordingly, the third-party beneficiary claim was allowed to proceed.
In Gallagher v. Long Island Plastic Surgeon Group,3 a medical group practice approached a plastic surgeon about the surgeon merging her practice into the group. The parties negotiated a written merger agreement but never executed the document. The surgeon sued to enforce the unsigned document. After the jury found in the surgeon's favor, the medical group moved to set the verdict aside. The court denied the motion and entered judgment for the surgeon. The medical group appealed.
In affirming the denial of a motion to set the verdict aside, the Second Department followed the rule that an unsigned document may be enforced as a contract provided there is objective evidence establishing that the parties intended to be bound by it.4 The court noted that in determining whether the parties had entered into a binding agreement, it must consider the objective manifestations of their intent as gathered from their words and deeds. The court stated that the language of the unsigned document did not preclude a finding that the parties intended to be bound by it. The document did not, on its face, show that the parties did not intend to be bound until they executed the merger agreement. The parties did not state in any document that they intended to be bound only by an executed written agreement. Accordingly, the court could look at the attendant circumstances to see whether they evidenced an intent to be bound by the unsigned document.
The Second Department believed the evidence in the record supported a conclusion that the parties intended to be bound by the unsigned document. The testimony and documentary evidence at trial showed that the parties had negotiated and agreed upon the major terms of the merger and had expressed those terms in the unsigned document. Both sides had actually begun performance in accordance with the terms of the document. Accordingly, the Second Department decided that the evidence could support a verdict in the surgeon's favor such that the jury's verdict was not contrary to the weight of the evidence. The court ruled that the court below had properly denied the medical group's motion to set the verdict aside.
In Highland HC v. Scott,5 the court addressed whether an arbitration agreement needed to be signed. In that case, plaintiff hired defendant to render architectural and engineering services. Plaintiff signed a contract proposed by defendant and returned it to defendant. The executed document stated that the attached general conditions were part of the document. The general conditions contained an agreement to arbitrate. Plaintiff executed only the document to which the general conditions were attached. It did not execute the general conditions or the arbitration provision. When plaintiff brought suit in connection with the engagement for which it had retained defendant, defendant moved to stay the action and compel arbitration. The Supreme Court denied the motion. Defendant appealed. The Second Department ruled that arbitration should have been compelled.