Port Chester Elec. Const. Co. v. Atlas

• Decision Date: 26 October 1976
• Citation: 357 N.E.2d 983,389 N.Y.S.2d 327,40 N.Y.2d 652
• Parties: , 357 N.E.2d 983 PORT CHESTER ELECTRICAL CONSTRUCTION CORP., Respondent, v. Edythe ATLAS et al., as Executors of Sol G. Atlas, Deceased, et al., Appellants, et al., Defendants.
• Court: New York Court of Appeals Court of Appeals

Page 327

389 N.Y.S.2d 327

40 N.Y.2d 652, 357 N.E.2d 983

PORT CHESTER ELECTRICAL CONSTRUCTION CORP., Respondent, v. Edythe ATLAS et al., as Executors of Sol G. Atlas, Deceased et al., Appellants, et al., Defendants.

Court of Appeals of New York.

Oct. 26, 1976.

Miles F. McDonald and Joseph Ferraro, New York City, for appellants.

David Morgulas, New York City, for respondent.

JASEN, Judge.

Until his death in July, 1973, the late Sol G. Atlas was actively engaged in the acquisition and development of real property. Atlas organized his various ownership and construction ventures into a complex network of separate corporations in which he had both a controlling interest and an active leadership role. This case involves the efforts of an independent subcontractor on an Atlas project to collect a money judgment it obtained against an Atlas controlled general contractor. Since the general contractor was virtually judgment proof due to certain financial manipulations, the subcontractor endeavored to enforce its juegment against other corporations allied with Atlas in the venture, as well as against Atlas' estate. The trial court, by piercing the corporate veil of the various corporate defendants and holding that the subcontractor was a third-party beneficiary of contracts between these Atlas corporations, granted the relief sought. The Appellate Division affirmed, placing primary reliance upon the third-party beneficiary theory. While we disagree with the theories developed by the courts below, we are in accord with the result reached. In our view, the subcontractor was entitled to enforce its money judgment against the defendant corporations and the estate of Sol C. Atlas through a special proceeding authorized by CPLR article 52. Since all necessary parties are before the court, the court may convert the plenary action into a special proceeding (CPLR 103, subd. (c); see Kovarsky v. Housing & Development Admin., 31 N.Y.2d 184, 335 N.Y.S.2d 383, 286 N.E.2d 882; Matter of First Nat. City Bank v. City of New York, 36 N.Y.2d 87, 365 N.Y.S.2d 493, 324 N.E.2d 861) and, on that basis, we would affirm the order of the Appellate Division, 47 A.D.2d 849, 368 N.Y.S.2d 814.

In 1956, defendant Essex Green, Inc. (Owner), the owner of a 48-acre tract in New Jersey, entered into a written contract with defendant Essex Construction Corp. (Contractor) for the construction of an $8,000,000 shopping center on its property. Both corporations were allied with various Atlas interests. The Contractor agreed to supply all labor and materials necessary for the work in return for a nominal fee of $5,000. The contract further provided that the Owner should reimburse the Contractor in current funds for all costs necessarily expended or incurred in the prosecution of the work. This provision, known in the construction industry as a 'cost plus a fixed fee' clause, stated that:

'5. The Owner shall reimburse the Contractor in current funds for all costs necessarily expended and or incurred for the proper prosecution of the work, such costs to include and to be limited to the following items:

'(c) Amounts of all sub-contracts;

'8. The Contractor shall, on or before the tenth day of each month deliver to the Owner a statement, sworn to if required, showing in detail and as completely as possible all moneys paid by it on account of the cost of the work during the previous month for which it is to be reimbursed under paragraph numbered 5 hereof. Such statements shall be checked by the Owner immediately upon the receipt thereof and the moneys shown to be due therein, subject to any corrections made as a result of said check, shall be paid on or before the fifteenth day of each month after the receipt of said statements by the Owner.'

In 1957, the general contractor entered into a subcontract with plaintiff for performance of all electrical work on the project. The subcontract referred to certain provisions of the general contract that were to be incorporated therein. A clause provided for submission of controversies and claims to arbitration. Plaintiff completed its work in May, 1958, received a substantial amount on its contract and made a claim of $96,940 for extra work performed. The Contractor resisted the claim and counterclaimed for approximately $52,000 in offsets. When the parties were unable to reach an accommodatio plaintiff, in December, 1960, pursuant to the subcontract, demanded arbitration. The arbitration proceeding was unusually protracted. The plaintiff finally prevailed in June, 1966 and received an award of $73,000, plus interest. The award was confirmed by the Supreme Court and judgment was entered for $105,011 in favor of the plaintiff.

Plaintiff's efforts to collect its judgment against the Contractor were unsuccessful. As a result of certain financial manipulations directed by Atlas, the assets of the venture, the bulk of which had previously been lodged in the Owner, were transferred to Atlas and to his other allied corporations. Both the Owner and the general contractor were rendered virtually judgment proof. The plaintiff, to enforce its judgment, commenced this action against the defendant corporations which ended up with the assets, the estate of Atlas, and the Owner. In granting recovery to the plaintiff, Trial Term held that as a third-party beneficiary of the general contract, the plaintiff could enforce the Owner's obligation to pay the cost of the work performed under the electrical subcontract. The court also placed liability on the Owner by piercing its corporate veil. The Appellate Division affirmed, agreeing generally with the reasoning of Trial Term and noting particularly that plaintiff was a third-party creditor beneficiary. It also observed that the June, 1966 arbitration award, which formed the basis for the judgment under review, was never contested by any of the defendants, despite the active, personal participation of Atlas in the arbitration proceeding and the obvious right, for himself and on behalf of the other defendants, to contest.

We do not agree that the plaintiff is a third-party creditor beneficiary of the contract between the owner, Essex Green, Inc., and the general contractor, Essex Construction. It is old law that a third party may sue as a beneficiary on a contract made for his benefit. (Lawrence v. Fox, 20 N.Y. 268; 17 A C.J.S. Contracts, § 519(3); 10 N.Y.Jur., Contracts, § 237.) However, an intent to benefit the third party must be shown (Beveridge v. New York El. R.R. Co., 112 N.Y. 1, 26, 19 N.E. 489, 496; Cerullo v. Aetna Cas. & Sur. Co., 41 A.D.2d 1, 341 N.Y.S.2d 767), and, absent such intent, the third party is merely an incidental beneficiary with no right to enforce the particular contracts. (Associated Flour Haulers & Warehousemen v. Hoffman, 282 N.Y. 173, 180, 26 N.E.2d 7, 9; Moch Co. v. Rensselaer Water Co., 247 N.Y. 160, 159 N.E. 896; Simpson, Contracts, § 117.) Difficulty may be encountered, however, in applying the intent to benefit test in construction contracts because of the multiple contractual relationships involved and because performance ultimately, if indirectly, runs to each party of the several contracts. Hence, interpretational difficulties prevalent in third-party beneficiary contracts are compounded as a result of the peculiar problems presented by construction contracts.

Generally it has been held that the ordinary construction contract--i.e., one which does not expressly state that the intention of the contracting parties is to benefit a third party--does not give third parties who contract with the promisee the right to enforce the latter's contract with another. Such third parties are generally considered mere incidental beneficiaries. (Cerp Constr. Co. v. J. J. Cleary, Inc., 59 Misc.2d 489, 299 N.Y.S.2d 560, affd. 31 A.D.2d 784, 298 N.Y.S.2d 469; International Erectors v. Wilhoit Steel Erectors &...