Cooperatives and Condominiums Construction Defects: Third-Party ...

SERVING THE BENCH
AND BAR SINCE 1888
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volume 227—No. 83
WeDNeSDaY, maY 1, 2002
Cooperatives and Condominiums
By RICHARD SIEGLER AnD EVA TALEL
Construction Defects: Third-Party Beneficiaries
Where cooperative housing
breach-of-contract claim on the ground that the
corporations and condominium
condominium board was the intended third-party
associations have attempted to
beneficiary of the contracts between the developer
assert third-party beneficiary rights
and the engineering and design professionals. here,
to enforce performance or warranty rights under
the documentation relied on by the court, including
construction and design contracts between devel-
the offering plan, revealed the developer’s intent
opers and contractors, architects and engineers,
to make the unit owners intended beneficiaries of
results have been inconsistent. these results
the design contracts. the court noted that because
have left co-op and condominium entities with
design and construction failures affect an owner’s
inadequate remedies, especially if the developer
standard of living and ability to sell, it could not be
becomes insolvent or has inadequate resources to
concluded that the owner was merely an incidental
correct construction defects. With the increas-
Richard Siegler
Eva Talel
rather than intended contract beneficiary.
ing number of new construction condominium
Similarly, in The Board of Managers of the
offerings, this issue will become a more prevalent claims third-party rights therefrom, New York has Alfred Condominium v. Carol Management,5 the
problem, as evidenced by two appellate decisions adopted the standard set forth in the restatement First Department allowed a third-party beneficiary
last year, which refused to recognize third-party (Second) of contracts.2 Section 302(1) provides breach of contract claim, despite a disclaimer of
rights concerning alleged condominium construc-
that “unless otherwise agreed between promisor any obligations to third parties in the contract
tion defects.
and promisee, a beneficiary of a promise is an itself. a rider to the contract explicitly referred to
this column addresses limitations on the asser-
intended beneficiary if recognition of a right to the condominium owners as “beneficiary parties”
tion of rights by third-party beneficiaries and performance in the beneficiary is appropriate to to the agreement. the court found this evidence
discusses the two 2001 decisions that curtailed effectuate the intentions of the parties and either: persuasive of intent to confer third-party rights
the remedies of the condominium entities. Some (a) the performance of the promise will satisfy an upon the condominium owners.
recommendations are offered on how co-op and obligation of the promisee to pay money to the
condominium boards can be protected and pro-
beneficiary; or (b) the circumstances indicate that Dismissing Third-Party Claims
vided the option to bring claims directly against the promisee intends to give the beneficiary the
the responsible contractors, architects and engi-
benefit of the promised performance.” in effect,
in contrast, the Fourth Department in Amherst
neers.
if a beneficiary would be reasonable in relying on Magnetic Imaging Assoc., v. Community Blue6 dis-
a promise as manifesting an intention to confer a missed a third-party claim, relying on what the
Governing Principles
right on him, he is an intended beneficiary. it is court characterized as “an unambiguous contract”
the evidence of intent that decisions turn on.
that did not evidence intent to benefit a third
at common law, the general rule was that privity
in R.H. Sanbar Projects, Inc. v. Gruzen Part-
party. although there appeared to be evidence
between a plaintiff and a defendant was necessary nership,3 the owner of the condominium building that the third parties were “known and intended
to maintain a contractual action. however, since claimed to be a third-party beneficiary of the con-
beneficiaries,” the court held that those who
the court of appeals decided Lawrence v. Fox1 in tract between the developer and the architect/sub-
are not in privity under the contract are merely
1859, it is generally accepted that a third-party contractor. the First Department of the appellate incidental beneficiaries with no right to recover
may only enforce a contractual obligation made Division of the Supreme court allowed the third-
thereunder.
for its benefit. this recognition arose from the party claim because the architect’s performance
Similarly, the Second Department in Pile Foun-
notion that it was just and practical to permit was manifestly to be for the direct benefit of the dation Construction Co. v. Berger, Lehman Assoc.7
the person for whose benefit a contract is made owner. the court engaged in a factual analysis dismissed such a claim. the court determined that
to enforce the contract against the party required of the operative documents and held that it is contract references to the contemplated construc-
to perform.
almost inconceivable that professional engineers tion and the bidding of the project were insuffi-
in cases where one is not a contractual party, but or architects who render their services in con-
cient to demonstrate that plaintiff/owner was an
nection with major construction projects would intended third-party beneficiary.
Richard Siegler is a partner in the firm of Stroock not contemplate that the performance of their
Further, in Board of Managers of Riverview at
& Stroock & Lavan LLP and is an adjunct professor contractual obligations would ultimately benefit Col ege Point Condominium III v. Schorr Bros. Dev.
at New York Law School where he teaches a course the owner.
Corp.,8 the Second Department found no intent
on cooperative housing and condominium law. Eva
to make condominium unit owners and a board
Talel is also a partner in Stroock & Stroock & Lavan Intended Beneficiary
of managers third-party beneficiaries. the court
LLP, specializing in litigation involving co-ops and con-
reiterated the general rule that contracts do not
dominiums. Kimberly Sparagna, a student at
in The Board of Managers of the Astor Terrace ordinarily give third parties who contract with the
New York Law School, assisted in the preparation of Condominium v. Schuman, Lichtenstein, Claman promisee the right to enforce the latter’s contract
this article.
& Efron,4 the First Department again allowed a with another. Because the construction contract

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NeW YorK laW JourNal
WeDNeSDaY, maY 1, 2002
at issue did not expressly state that the intention tionship, while recent First Department decisions Second, at the very minimum, the Department of
of the contracting parties was to benefit a third in Alexandria and Rockrose, raise questions as to the law should require that the absence of these rights
party, no claim was permitted.
direction in which the First Department is going on in favor of boards be identified as a “Special risk”
these cases reveal the divergence between the this issue. this diversity of views among (and even in the offering plan.
appellate courts that emerges from the case-by-
within) the appellate courts creates uncertainty
Finally, developers should seek in their construc-
case application of the restatement standard and, and therefore results in inadequate remedies for tion agreements to expressly provide rights for
accordingly, the uncertainty that co-op and con-
construction and design defects.
third-party beneficiaries, such as co-op and condo-
dominium boards are likely to face in determining
it important to note that construction contracts minium boards, so that they will unequivocally be
whether third-party rights have been conferred are created before a co-op or condominium board able to enforce rights under such contracts. even if
upon them.
has any input. co-op and condominium boards are, contractors, architects or engineers seek to impose
therefore, at a disadvantage and at the developer’s higher costs on developers because of the enhanced
Recent Decisions
mercy to negotiate a contract that allows them the risk of claims from third-party beneficiaries, this
right to bring a claim against third parties. this expense is equivalent to an insurance premium
last year, the First Department dealt with the calls into question how co-op and condominium to reduce the risk to the developer of becoming
third-party beneficiary issue in Board of Managers boards can protect themselves.
embroiled in litigation where the developer may
of the Alexandria Condominium v. Broadway/72nd
here are some recommendations:
not really be at fault.
Associates.9 this case involved a developer who
First, developers should assign all their interests
hired a construction manger pursuant to an agree-
in construction contracts to co-op and condo-
Conclusion
ment, which stated that all work would be done minium boards. By assigning these contracts, the
in a competent and workmanlike manner. Several developer transfers the owner’s enforcement rights
typically, boards are insulated from contractors,
structural problems arose and the building devel-
to the boards and thereby removes the developer architects and engineers both during the course of
oped leaks. the condominium board sued both the from the center of the litigation process. this construction and during the pursuit of remedies
developer and the construction manager for the should not place any additional burden on the in the event of construction or design defects.
damage. the contract between the sponsor and developer. in fact, it should be in the developer’s protecting the rights of a co-op or condominium
the construction manager provided, in relevant best interest to assign all contracts. once the devel-
board, as a third-party beneficiary of a construction
part, that:
oper has paid the contractor, architect or engineer or design agreement, has the advantages of: (1)
the sole beneficiaries of this agreement are
under the contractual terms, the developer can holding the contractors, architects or engineers
the parties hereto … this agreement is not
then remove itself from liability because a board fully accountable for deficiencies in their work,
intended to confer any benefit or rights upon
will now have the ability to bring suit directly in practice as well as in theory, without regard to
persons other than the parties hereto.
against the appropriate contractor, architect or the developer’s solvency; (2) limiting the liability
the contract, by its own terms, thus expressly engineer for construction or design defects.
of the contractor, architect, or engineer to the
negated enforcement by a third-party. the First
although developers who are sued by condo-
contractual obligations agreed upon with the devel-
Department found this express language controlling minium or co-op boards for design or constructions oper; and (3) protecting justifiable expectations
and ultimately denied the condominium board’s defects can implead contractors, architects and of co-op and condominium purchasers that they
motion to amend its complaint to assert a contract engineers and boards can later amend their com-
will have available adequate remedies to subject
claim as a third-party beneficiary.
plaints to join such firms as third parties, the rules the contractors, architects, and engineers of their
additionally, last year the First Department in of civil procedure often create pitfalls. third-party development to claims for construction and design
The Residential Board of Managers of the 99 Jane rights can be guaranteed only by requiring the defects. co-op and condominium owners need this
Street Condominium v. Rockrose Development Corp.10 developer to assign all contracts. in that way, all comprehensive protection against deficient per-
also denied a third-party beneficiary claim. the parties win. the co-op and condominium boards formance by building contractors, architects, and
court found that the contract specifically provided have an assured method of recourse to protect engineers to realize the benefit of their investment
that it was not to be assigned and did not in any unit owners. the sponsor is free from the litiga-
in such units.
way refer to the unit owners. the condominium tion process. moreover, contractors, architects and
board cited the Alfred and Astor Terrace cases to engineers have no greater liability because the
•••••••••••••••••••••••••••••••
support its right to assert a claim. however, the extent of their liability is measured by the original
(1) 20 N.Y. 268.
court found the case more analogous to Board of contract. assigning contracts is an equitable means
(2) Fourth Ocean Putnam Corp. v. Interstate Wrecking Co.,
Inc., 66 N.Y.2d 38 (1985).
Manager of Riverview at Col ege Point Condominium to protect all parties.
(3) 148 a.D.2d 316 (1st Dept. 1989).
III v. Schorr Bros. Dev. Corp.,11 where the Second
another suggestion is that the New York State
(4) 183 a.D.2d 488 (1st Dept. 1992).
Department reiterated that third parties to ordi-
Department of law be more involved with the
(5) 214 a.D.2d 380 (1st Dept. 1995).
(6) 286 a.D.2d 896 (4th Dept. 2001).
nary construction contracts are mere incidental review of contracts submitted to it as part of an
(7) 253 a.D.2d 484 (2nd Dept. 1998).
beneficiaries and cannot enforce a contract that offering plan for a new construction co-op or con-
(8) 182 a.D.2d 664 (2nd Dept. 1992)
(9) 285 a.D.2d 422 (1st Dept. 2001).
they were not intended to benefit from.
dominium. the Department of law is responsible
(10) N.Y.l.J., oct. 17, 2001, at 13.
there is thus a great deal of uncertainty that has for reviewing all co-op and condominium offering
(11) 182 a.D.2d 664 (2d Dept. 1992).
been created by appellate court decisions regarding plans before sales are permitted.12 With the increase
(12) N.Y. Gen. Bus. law §352 (mcKinney 2001), also
known as the martin act.
the availability of third-party beneficiary claims. it in the number of new construction condominium
is evident from the Astor Terrace and Alfred Con-
projects, the Department of law should take an
dominium decisions that the First Department has active step in protecting co-op and condominium
historically been more willing to permit a depar-
unit owners.
ture from the typical owner relationship with
there are two positions that the Department
the contractor, architect, or engineer and allow of law can adopt to assure that adequate remedies
a third-party beneficiary claim unless the parties are available to co-op and condominium boards for
have manifested a clear intent in the contract construction and design defects. First, a thorough
not to do so. the First Department appears to review of each construction contract should be
have recognized that compelling performance will undertaken to determine that enforcement rights
ultimately benefit the owners of the development, for design and construction defects are expressly
Reprinted with permission from the May 1, 2002 edition of
which is enough to justify granting third-party conferred upon co-op and condominium boards.
the New YoRk Law JouRNaL. © 2002 aLM Properties,
rights in favor of a condominium board. on the this will ultimately enable co-op and condomini-
Inc. all rights reserved. Further duplication without permis-
other hand, the Second and Fourth departments um boards to enforce rights to protect unit owners
sion is prohibited. For information, contact 212.545.6111 or
appear less flexible in viewing the contractual rela-
from construction problems and insolvent sponsors.
cms@alm.com. #070-04-08-0041

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