Superior Court Holds Hotel Operator Was Not Third-Party Beneficiary Of Owner’s Contract With General Contractor But Issue Of Fact Whether Operator Was Assignee Of Owner

| Nov 22, 2013 | Firm News

In a dispute over the construction of a Newport hotel, the Rhode Island Superior Court has partially granted and partially denied the general contractor’s summary judgment motion respecting whether the hotel operator could bring claims for damages. The Court held as a matter of law that the operator was not a third-party beneficiary of the contract between the hotel owner and the contractor and was not the owner’s successor. However, the Court said there were material issues of fact regarding whether the operator was the assignee of the owner.

The contract between the owner and contractor referred to the operator in language defining the contract’s purpose and in other parts of the contracts and its attachments. The operator was specifically created to operate the hotel. It applied for an employer identification number, opened bank accounts and set up a payroll for employees. The owner assigned its rights and interests in the operation of the hotel to the operator.

As an initial matter, the Court rejected the contractor’s argument that operator could not plead alternatively that it was a third-party beneficiary of the contract or a successor or assign of the owner. It said that pursuant to Super.R.Civ.P. 8(e)(2) a party could plead alternative theories of liability.

The Court then reviewed the law with respect to third-party beneficiaries of contracts. Only intended, and not incidental, beneficiaries can maintain an action for damages resulting from a breach of contract between two other contracting parties. The promissor’s mere awareness that someone other than the promissee may derive a benefit from the promissor’s performance is insufficient to make the third-party a beneficiary that can enforce the contract. The third party can enforce the contract when the promissor and promissee contract for the benefit of the third party. The law presumes that parties contract only to benefit themselves. A contract will not be considered made for the benefit of a third party unless it clearly appears that was the parties’ intention. The Court said mere reference to the operator in the contract was insufficient to overcome the presumption that the contract was only for the benefit of the owner and the contractor.

Next, the Court considered whether the operator was a successor of the owner. A successor in interest is one who follows another in ownership or control of property. Where there is a “high degree of similarity in role and interest” between a property owner and its purported successor, the latter could be deemed a successor. The Court said the operator did not assume any obligations of the owner. At most, it obtained the ability to operate the hotel from the owner. The owner retained ownership.

Finally, the Court considered whether the operator was an assignee of the owner. An assignment is an “immediate and irrevocable transfer of all rights” in the assigned property. The subject matter of the assignment must be described so it is “readily identifiable.” There must be clear evidence of the assignor’s intent to transfer its rights without further action or manifestation of intention. There can be an equitable assignment where there is sufficient evidence of an intent to assign and a mutual understanding that an assignment has taken place. The assignor must completely relinquish control over the property.

The Court said there was an issue of fact whether the owner had immediately and irrevocably transferred to the operator the right operate the hotel . The owner said the operator was created for the specific purpose of operating the hotel. The operator applied for an employer identification number, opened up bank accounts and set up a payroll. The operator began operating the hotel and the owner did not. There was sufficient evidence to create an issue of fact as to whether there had been an equitable assignment.

802 Partners, LLC v. Behan Bros., Inc., N.M. 10-526, N.C. 10-537, slip opinion (R.I.Super. Nov. 20, 2013)

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