Federal Court in Georgia Holds Specific Contractual Intent to Benefit Required for Tenant to Be Third-Party Beneficiary of Construction Contract

by Pepper Hamilton LLP

J.C. Penney Props. v. Hiram LL, LLC, 2016 U.S. Dist. LEXIS 8027 (N.D. Ga. Jan. 25, 2016)

In January 2008, Hiram LL, LLC (“Hiram”) leased property to J.C. Penney Properties, Inc. (“J.C. Penney”) for the construction and operation of a J.C. Penney retail store.  Pursuant to the lease, Hiram was required “to design and construct certain improvements on the property” to prepare the site on which J.C. Penney planned to build its store.  Based on plans and specifications prepared by an architect, Hiram entered into a contract (the “Contract”) with Benning Construction Company (“Benning”) to construct the site.  The Contract was based on two AIA forms:  the A101 standard agreement and the A201 general conditions.  Benning completed its construction work and J.C. Penney eventually opened the store for business.

After opening for business, in September 2009, J.C. Penney’s store flooded.  In September 2013, J.C. Penney filed a complaint against Hiram and the architect seeking damages and other relief in connection with the flood.  In April 2015, J.C. Penney filed an amended complaint to include third-party beneficiary claims against Benning for breach of contract and attorneys’ fees.  J.C. Penney alleged that Benning failed to ensure that fabric inserts were removed from all of the stormwater drain inlets on the property in a timely manner.  Benning moved to dismiss both claims.

The United States District Court for the Northern District of Georgia granted Benning’s motion and dismissed both claims with prejudice because J.C. Penney was unable to identify a specific contractual provision that demonstrated intent to benefit J.C. Penney as a third party.  The court stated that to create a third-party beneficiary, the intention of the contracting parties to create such a beneficiary must be clear when analyzing the contract as a whole.

To support dismissal, Benning pointed to a Contract provision that stated, “[t]he Contract Documents shall not be construed to create a contractual relationship of any kind…between any persons or entities other than [Hiram] and [Benning].”  In light of this provision, the court found that J.C. Penney needed to identify another specific Contract provision that demonstrated intent to benefit J.C. Penney as a third party.

First, J.C. Penney argued that the Contract evidenced the requisite intent because the first page identified the project as the “JCP Hiram Project.”  But, the court held that simply identifying J.C. Penney as a potential future occupant of the building fell short of expressing a clear intent to permit J.C. Penney the right to enforce the Contract as a third party.

Second, J.C. Penney pointed to two Contract provisions that required Benning to take reasonable precautions and provide reasonable protection to prevent damage, injury, or loss to (1) its own work, material, and equipment under its care, custody, or control and (2) other property at or adjacent to the work site that is not designated for removal, relocation, or replacement in the course of construction.  But, the court found that neither provision demonstrated the requisite intent because the alleged flood damage at issue did not occur during the course of Benning’s work and Benning’s work was no longer under its care, custody, or control at the time the store flooded.  Thus, the damages that J.C. Penney allegedly suffered were not the kind of damages that the two provisions obligated Benning to guard against.

Because J.C. Penney could not point to a contractual provision that specifically demonstrated intent to benefit J.C. Penney, the court held that J.C. Penney was not an intended third-party beneficiary.  Further, because the underlying third-party beneficiary claim was dismissed, the court also dismissed the corresponding claim for attorneys’ fees.

To view the full text of the court’s decision, courtesy of Lexis ®, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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