No End Run on Contract Claims Allowed against Remote Party

One would think the message has penetrated by now, to subcontractors and vendors. But a New York court has had to address this issue once again, and has confirmed the legal principle: if party A has a contract with party B, party A won’t be allowed to do an end run on B to get to party C. Not for unjust enrichment, not under third-party beneficiary status, not under negligence theories, and not for equitable relief.

A sub filed suit against the contractor, and also against two owner-related entities. The latter filed motions to dismiss, and the court allowed those motions, without prejudice to the sub amending its claims. But the amended claims attempted against the owner were also dismissed. The sub had a contract with the prime contractor (who remained in the lawsuit). Thus, under New York law – and on these issues, New York law is consistent with most other states – the sub did not have viable claims against the owner. Even if the owner may have been unjustly enriched. Even though the owner’s contract with the prime called for the prime to pay its subs, and allowed the owner to do so, voluntarily, if the prime did not. Even under a claim of negligence in ensuring payment to lower tiers.

It may not seem fair to a sub or vendor who has not been paid, but this is the prevailing legal standard. One having a contract right to recover payment will not be allowed to file a cause of action against another party higher on the food chain than the direct contract. The sub/vendor will have to pursue its contract rights against the party with whom it contracted. Period.

There are of course causes of action where a remote-tier party might have a claim outside the direct contract, such as against a payment bond or under a lien law. Those claims can arise from the existence of third-party beneficiary contracts (which is the essence of a surety bond), or from statutory remedies. But those were not the claims asserted here. Absent special circumstances, the sub would not have a cause of action against the owner, just as a sub-sub would not have a cause of action against the GC. This long-standing legal principle has been reconfirmed. The case is IPA Stone Corp. v Facet Constr. LLC, 2016 N.Y. Misc. LEXIS 2397 (June 28, 2016).