KMART Corporation v. Balfour Beatty, Inc.
994 F. Supp. 634 (1998)
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Rule of Law:
A third party is an intended beneficiary of a contract if recognizing their right to sue is appropriate to effectuate the parties' intent and the promisor's performance will satisfy a duty the promisee owes to the third party. An intended third-party beneficiary who seeks to enforce rights under a contract is also bound by all of its terms, including mandatory arbitration clauses.
Facts:
- Tutu Park Ltd. (TPL) was the owner of a shopping center where KMART Corporation (KMART) was a tenant.
- In January 1992, TPL entered into a contract with Balfour Beatty Incorporated (BBI) for the design and construction of the shopping center.
- The contract's specifications required BBI's construction schedules to comply with KMART's requirements.
- The contract also mandated that BBI submit its design drawings to KMART.
- Furthermore, the contract required that all warranties for the construction work be executed in KMART's favor and delivered directly to KMART.
- In September 1995, the roof of the shopping center, including KMART's store, was damaged by Hurricane Marilyn.
Procedural Posture:
- KMART Corporation sued Balfour Beatty Incorporated (BBI) in the District Court of the Virgin Islands, a court of first instance, alleging breach of contract and negligence.
- BBI filed a motion to dismiss for failure to state a claim, arguing that KMART was not an intended third-party beneficiary to the construction contract.
- In the alternative, BBI moved to stay the court proceedings pending arbitration if the court found KMART to be a third-party beneficiary.
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Issue:
Is a tenant, whose participation and benefit are specified in a construction contract between its landlord and a builder, an intended third-party beneficiary who is entitled to sue under the contract but is also bound by its arbitration clause?
Opinions:
Majority - Moore, C.J.
Yes. A tenant is an intended third-party beneficiary when contract terms demonstrate an intent to benefit them, but in seeking to enforce the contract, the tenant accepts all its terms, including any mandatory arbitration clauses. The court applied the Restatement (Second) of Contracts § 302, finding that KMART was an intended beneficiary because TPL (the promisee) had a duty to provide a building to KMART, and BBI's (the promisor) performance of the construction contract satisfied that duty. Additionally, the contract provisions requiring KMART's involvement in schedules, drawings, and receipt of warranties clearly demonstrated the parties' intent to confer a benefit on KMART. However, a third-party beneficiary cannot selectively enforce a contract; it must accept the burdens along with the benefits. Because KMART seeks to enforce its rights as a beneficiary, it is also bound by the contract's mandatory arbitration clause.
Analysis:
This decision exemplifies the modern trend of recognizing third-party beneficiary status in construction contracts when there is clear evidence of intent to benefit the third party. It moves beyond older, more restrictive views by focusing on specific contractual provisions that directly involve and benefit the non-signatory, such as a major tenant. The case critically reinforces the principle that rights and obligations under a contract are a package deal. It establishes that a beneficiary who avails themselves of the right to sue under a contract implicitly accepts all of its terms, including procedural limitations like arbitration clauses, preventing beneficiaries from cherry-picking favorable provisions while discarding unfavorable ones.
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