Kmart Corp. v. Balfour Beatty

District Court of the Virgin Islands · 1998 · Contracts

ContractsThird-Party BeneficiariesArbitrationthird-party beneficiaryintended beneficiaryincidental beneficiaryRestatement Second of Contracts § 302Restatement § 304

Facts

In 1992, BBI entered into a contract with Tutu Park Ltd. to design and build a shopping center in St. Thomas. KMART was a tenant in that shopping center, and after hurricane damage to the roof in 1995, KMART sued in 1997 alleging breach of contract and negligence, claiming it was a third-party beneficiary of the construction contract. KMART pointed to contract specifications requiring construction schedules to comply with KMART's requirements, drawings to be submitted to KMART, and warranties to be executed in KMART's favor and sent directly to KMART. BBI argued KMART was not a party to the contract and therefore could not sue on it.

Issue

Was KMART an intended third-party beneficiary of the construction contract between BBI and Tutu Park Ltd., such that it could enforce the contract? If so, was KMART also bound by the contract's arbitration clause, requiring the court to stay the litigation pending arbitration?

Rule

Under Restatement (Second) of Contracts § 302, a nonparty is an intended beneficiary if recognizing a right to performance is appropriate to effectuate the parties' intent and either the promised performance will satisfy an obligation of the promisee to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. An intended beneficiary may enforce the contract under § 304, but a third-party beneficiary must take the contract as a whole and is therefore bound by its arbitration provision.

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In Phoenix, Desert Mesa Properties hired Suncrest Builders to construct a grocery store shell for space already leased to Nora Patel's market. The construction agreement required Suncrest to submit design drawings to Nora Patel for review, follow construction milestones set to meet her opening date, and deliver roofing and HVAC warranties directly in her favor. After water intrusion damaged inventory, Nora sued Suncrest for breach of the construction contract as a nonparty beneficiary.

Is Nora most likely an intended third-party beneficiary entitled to enforce the construction contract?

Explanation. Under Restatement § 302 as applied by the majority, a nonparty is an intended beneficiary if recognizing a right to performance effectuates the parties' intent and either performance satisfies an obligation owed by the promisee to the beneficiary or the circumstances show an intent to give the beneficiary the benefit of performance. Here, the lease obligation to provide the tenant's space plus contract terms requiring drawings, scheduling, and warranties for Nora strongly indicate intended-beneficiary status. A formal label is unnecessary, and non-signatory status alone does not bar enforcement.