Deconstruction Blues

A recent decision in The Residential Board of Managers of the 99 Jane Street Condominium v. Rockrose Development Corp. held that a condominium board of managers could not sue the designers and contractors of a new building for construction defects. The court found that the language in specific contracts demonstrated that the documents were not intended to benefit the board.

In this action, the board of managers sought to recover for alleged defects in the design and construction of the condominium building. The defendants, Fox & Fowle, architects, and Severud & Associates moved to dismiss the complaint, because of the lack of privity (i.e., a legal relationship) between them and the board. They also sought to dismiss "all claims that have been or could have been asserted" against them in this action. Defendant Cosentini Associates cross-moved for the same relief, on the same grounds.

The board began this action alleging professional malpractice and breach of contract in connection with the design and building of the condominium. Fox & Fowle was the architect originally retained by defendant Rockrose Development Corp., the developer of the condominium, in December 1995, to design a rental building. In August 1996, Rockrose changed its plans, and sought instead to build a luxury condominium building. The agreement provided that either party would permit no assignment of the agreement, except under limited circumstances not implicated in this action.

Severud entered into a contract, dated April 10, 1996, and executed sometime thereafter, with defendant Rockrose Construction (Jack) Corp., general contractor for the project, who, according to the agreement, was acting as an agent for defendant 99 Jane L.L.C., the owner. The agreement provided that it "shall bind, apply to and run in favor of the parties hereto, and their successors in interest, and legal representatives." Severud was to provide structural engineering consulting services under the direction of Fox & Fowle.

Consentini entered into an agreement dated April 10, 1996, and executed sometime thereafter, with Rockrose-Jack, acting as agent for non-party Strasbourg Realty Co. Cosentini was to provide mechanical, electrical, plumbing, and sprinkler engineering services, in conjunction with, and under the direction of, Fox & Fowle.

The board, an unincorporated association of unit-owners, was formed on April 28, 1999. It was responsible for the management, operation, and maintenance of the residential section of the condominium. It brought the action to recover for allegedly defective construction of the condominium. It sought recovery against Fox & Fowle based on breach of contract, asserting that plaintiff and the unit-owners were known and intended beneficiaries of the contract. The board also sought recovery against Fox & Fowle based on negligence. Other causes of action asserted claims against Consentini for breach of contract and negligence, respectively. Additional causes of action asserted claims for breach of contract and negligence, respectively, against Severud.

In moving to dismiss the claims against it, Fox & Fowle asserted that it had no contractual relationship with the board, nor was the board an intended beneficiary of the contract with Rockrose. Therefore, Fox & Fowle argued, the board had no standing to enforce the contract, and the board's contract claim, as against it, must be dismissed. Similarly, Fox & Fowle maintained that it owed no duty to the board, and therefore, the negligence cause of action should also be dismissed.

The board opposed the motion, saying that it was the intended beneficiary of the contract, and therefore, could pursue this action. It relied on two prior cases —Board of Managers of Alfred Condominium v. Carol Management Inc. and Board of Managers of Astor Terrace Condominium v. Schuman, Lichtenstein, Claman & Efron — in support of its position.

In order for the board to recover based on a breach of contract, the court said that the board must be in privity with the party sought to be charged, or the relationship must be "so close as to approach that of privity." The question presented here in the court's view was whether Fox & Fowle, or the engineers working on the condominium, can be found to have a relationship "approaching privity" with the board.

In the Alfred condominium case, the appellate division, first department, found that the purchasers of condominium units could enforce the terms of the construction manager's contract with the sponsor. Although there was a disclaimer of any obligations to third parties in the body of the agreement, the rider to the contract explicitly referred to the unit-owners as "beneficiary parties" to the agreement.

The architect's agreement with the sponsor was similarly enforceable by the unit-owners because there was no disclaimer of third-party liability, and the rights under the agreement "extended to the parties as well as their successors and assignees." The court also noted that the promotional materials highlighted the participation of the construction manager and architect with their apparent consent.

In the Astor Terrace case, the court noted that the sponsor's intent to make the unit-owners the intended beneficiaries of the design contract was discernible from the express language of the contract. In contrast to these older cases, the court said that Fox & Fowle's contract specifically provided that there was not to be any assignment of the agreements. Nor did the contract refer in any way to the eventual unit-owners. Thus, there was no basis upon which to conclude that the board was an intended beneficiary of the contract.

Rather, in the court's judgment, this situation was more analogous to that presented in yet another prior case. There, the court reiterated 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."

Severud's and Cosentini's agreements also failed to mention the board in any form. Further, their agreements stated that they apply only to the parties, "and their successors in interest, and legal representative." While the board argued that it should be included as Rockrose-Jack's successor in interest, the court said that it had presented no allegations, much less evidence, that it was Rockrose-Jack's successor in interest. In order for an entity to be a successor in interest, the court said that the change in entity must be "in form only and not in substance."

In the case of a corporation, the term "ordinarily indicates statutory succession as, for instance, when corporation changes its name but retains same property." Here, there was no claim that the board had, in any way, taken over Rockrose-Jack, or was, in effect, the same entity with a different name. In fact, Rockrose-Jack apparently not only still existed, but also was a defendant in the action. Therefore, the board had failed to demonstrate that it was a successor in interest to Rockrose-Jack, so as to entitle it to enforce the contracts with Cosentini and Severud.

The board also sought to recover from Fox & Fowle, Severud, and Cosentini on the basis of their alleged negligence. However, the court held that such recovery for pecuniary loss might be had only where there was actual privity of contract, or one so close as to approach that of privity. As discussed, the board had failed to demonstrate such a relationship with these defendants. Consequently, the causes of action for negligence were also dismissed.

The defendants requested that not only this action but that any claims that could have been asserted against them in this action be dismissed. That request was denied. The court said that, because the board did not have standing to enforce the contracts, this did not relieve these defendants from any potential liability based on claims that other parties in this action might have against them.

Comment: This case left the board with a cause of action against the sponsor of the condominium plan for the building. However, the sponsor might be without assets or insolvent. Even if the sponsor could be induced to instigate a legal proceeding to place ultimate liability on the various designers and contractors, this might still result in substantial delays for the board to press its claim.