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M.G.M. Construction Corp. v. New Jersey Educational Facilities Authority

Decided: May 13, 1987.


Carchman, J.s.c.


[220 NJSuper Page 484] On November 14, 1983 plaintiff M.G.M. Construction Corporation (hereinafter referred to as "MGM") and defendant New Jersey Educational Facilities Authority (hereinafter referred to as "NJEFA") entered into a contract to perform construction work on the dining service expansion at Trenton State College. NJEFA also entered into identical contracts with defendant Sussna Design Office (hereinafter referred to as "Sussna") for architectural and design services and Bilman Mechanical Contractors, Inc. (hereinafter referred to as "Bilman") for plumbing, heating, ventilation and air conditioning services on the

project. MGM, Sussna and Bilman were all designated as co-prime contractors.

All contracts required the co-prime contractors to furnish to NJEFA surety bonds with payment and performance obligations. The bonds were to be provided in a separate performance obligation and payment obligation with each written in a penal sum equal to 100% of the contract price; alternatively the bonds were to be combined as a single instrument which would reflect a penal sum equal to 200% of the contract price. Bilman satisfied its bond obligation to NJEFA by securing a single instrument payment and performance bond from defendant Fidelity & Deposit Company of Maryland (hereinafter referred to as "F & D") in a penal sum equal to 200% of the contract price. Thereafter, Bilman defaulted, and pursuant to its performance obligations under the bonds F & D undertook efforts for completion of Bilman's obligations under the contract.

MGM brought this action alleging that as a result of Bilman's default the project was delayed, and MGM suffered damages. In count six of the complaint, MGM seeks to recover against F & D as Bilman's surety. MGM claims to be a third-party beneficiary of Bilman's bond and the contract with F & D.

F & D now moves to dismiss count six of the complaint.*fn1 The issues presented are whether MGM, as a co-prime contractor, is a third-party beneficiary of a single instrument payment and performance bond executed by Bilman as principal, F & D as surety, and NJEFA as obligee and whether MGM has a cause of action directly against F & D for the alleged damages caused by Bilman.

The relevant portions of the bond provide as follows:

Now, if the said principal [Bilman] shall well and faithfully do and perform the things agreed by the owner [NJEFA] to be done and performed according to the terms of the said contract, and shall pay all lawful claims of subcontractors, materialmen, laborers, persons, firms or corporations for labor performed, or materials . . . used . . . in the carrying forward, performing or completing of said contract, we agreeing and assenting that this undertaking shall be for the benefit of any subcontractor, materialman, laborer, person, firm or corporation having a just claim, as well as for the obligee [NJEFA] herein, then this obligation shall be void; otherwise the same shall remain in full force and effect; it being expressly understood and agreed that the liability of the surety [F & D] for any and all claims hereunder shall in no event exceed the penal amount of this obligation as herein stated. [ See N.J.S.A. 2A:44-147]

The contract executed between Bilman and NJEFA contains the following applicable language:

The Contractor agrees that he will make no claim for damages against the Authority by reason of any act, error or omission, of any other Contractor, the Architect/Engineer, or in connection with such other Contractor, or the Architect/Engineer. The Contractor shall have a right to pursue such claims for damages from the responsible Contractors or Architect/Engineers.

The contract further provides for mutual responsibility on the part of the various co-prime contractors (co-primes) whereby they agree to cooperate with each other in the scheduling of work and other matters so as to facilitate the completion of the project. The mutual responsibility provisions provide that if a co-prime's actions or failure to act results in delay, the remedy is an action against the co-prime; any action against the NJEFA is covered by the following language:

The bond in question is a statutorily created contract bond mandated by N.J.S.A. 2A:44-143 et seq. All parties agree that the Legislature intended to, and indeed did, create certain third-party rights in the payment provisions of the bond; however, MGM disputes that these rights are restricted and limited to the payment obligation. F & D argues that the class of third parties entitled to assert claims under the bond include those who performed work on or pursuant to the underlying contract, e.g., laborers and materialmen and as MGM does not fall

within that specific class, it has no third-party rights in the performance provisions of the bond. F & D further urges that had the Legislature intended nonparty claimants, such as MGM to have third-party rights in the performance provisions of the bond, it would not have expressly created such rights in a limited class. MGM suggests that the issue is one of intent, and while the intent is not explicitly stated here, MGM is implicitly included in such class.

It is well settled in New Jersey that contract interpretation must be based on the intent of the parties. See Ace Stone Inc. v. Wayne Township, 47 N.J. 431, 439 (1966); Tessmar v. Grosner, 23 N.J. 193, 201 (1957). To determine intent with a degree of certainty, the court must consider many factors, including the document itself and the surrounding circumstances. The issue of intent is critical to a determination as to whether one may be considered a third-party beneficiary under a contract. Broadway Maintenance Corp. v. Rutgers, 90 N.J. 253 (1982); Gold Mills Inc. v. Orbit Processing Corp., 121 N.J. Super. 370 (Law Div.1972).

The first analysis requires a determination as to whether the plain language of the bond specifically extends F & D's obligation to parties other than Bilman and NJEFA. When the bond itself is examined, not only is it clear that the surety, F & D, was guaranteeing Bilman's performance under the contract Bilman executed with NJEFA but that this was the only contract to which the bond was intended to apply. The bond states that F & D was to pay all lawful claims of "subcontractors, materialmen, laborers, persons, firms or corporations for labor performed or materials . . . used . . . in the carrying forward, performing or completing of said contract. . . ." Emphasis supplied. This payment language specifically refers only to those who are parties to the contract executed by and between between Bilman and NJEFA. Bilman agreed to pay the claims of those involved in the Bilman-NJEFA contract. Had Bilman failed to make such payments, F & D would have been compelled to do so as the guarantor under the payment bond.

The requirement of a direct contractual relationship as a prerequisite to liability under the bond is supported by a reading of the contract executed by Bilman and NJEFA, where the duty to supply a bond was created. The contract outlined Bilman's duty to furnish bonds "as security for the payment of all persons performing labor . . . under this contract and furnishing materials in connection with this contract. . . ." Emphasis supplied. The use of the words "this contract" made it clear that the bonds were to benefit only parties to the Bilman-NJEFA contract. Likewise, the bonds furnished by other contractors on the project were to be for the benefit of parties to those contracts. As MGM was not a party to the Bilman-NJEFA contract, a strict interpretation of the bond and contract supports the conclusion that MGM cannot claim against the surety under the payment provisions of the bond.

A review of the language in the bond evidences the intent to create a specific class of persons entitled to claim thereunder. The payment portion of the bond creates third-party beneficiary rights in those who furnished labor and materials under the Bilman-NJEFA contract. As noted above, MGM cannot claim under this section because it furnished labor and materials under its own contract with NJEFA, not under the Bilman contract. The performance obligation of the bond, moreover, names only the owner (NJEFA) as the beneficiary. There is no reference, explicit or implicit, to any other beneficiaries. F & D claims that the inclusion of specific third-parties in the payment portion evidences an awareness, on the part of the parties to the bond (and the Legislature), of how to create third-party rights, and a desire to do so under limited circumstances. In considering the plain language of the bond, the absence of such third-party rights in the performance provision evidences an intent, by way of exclusion, not to create those rights.

While the issue presented here is a matter of novel impression in New Jersey, it has been dealt with in other jurisdictions, and the majority rule precludes the recognition of the third-party rights urged by MGM.

In VanCor Inc. v. American Casualty Company, 417 Pa. 408, 208 A.2d 267 (Supreme Ct. 1965), the Pennsylvania Supreme Court was confronted with the same issue and facts similar to those presented in this case. VanCor was the successor to Van Campen, which had contracted to perform general construction work on a junior high school. A separate contract for the electrical work was awarded to Zucker. American Casualty issued two bonds on behalf of Zucker: a performance bond and a labor and materialmen bond. Zucker failed to complete its work under the contract and was replaced by another contractor. VanCor brought suit for damages allegedly suffered as a result of the delay caused by Zucker's default. American Casualty argued that it was only liable to the obligee, not the other contractors. VanCor alleged that the terms of Zucker's contract were incorporated into the bond, thus rendering defendant liable for Zucker's default.

The Pennsylvania Supreme Court determined that both parties to a contract must agree that third parties are to be beneficiaries and must express such an intent before third parties are able to recover. Denying third-party beneficiary status to VanCor, the court noted:

It must be kept in mind that we are considering [VanCor] status as a third-party beneficiary not only of the electrical construction contract but also of the contract executed by [American Casualty]. The parties involved here knew how to provide for third-party beneficiaries when they wrote into the contracts . . . that the contractor covenants and agrees to pay for all labor and material furnished in the performance of the contract. That they knew how to insert such a provision in a surety bond is evidenced by the wording of the condition of the labor and materialmen's bond here in suit. . . . [208 A.2d at 270]

The court found no evidence of an intention of the parties to make VanCor a third-party beneficiary entitled to recover ...

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