Facts
- SCA Services, Inc. faced internal corporate disputes and investigations concerning alleged misconduct and diversion of corporate funds by certain officers.
- Berton Steir, an SCA director and former senior officer, became involved in investigations and related litigation connected to his corporate service.
- SCA and Steir entered a separation/settlement agreement under which Steir would resign, and SCA would provide indemnification and pay for Steir’s legal representation in specified matters, including an SEC investigation.
- The agreement contemplated that SCA would make direct payments to Steir’s counsel for those services.
- Steir retained Choate, Hall & Stewart for the contemplated representation; the firm billed SCA pursuant to the agreement.
- SCA paid some invoices but later refused to pay additional fees unless Steir proved his innocence or repaid money SCA claimed had been diverted.
- The law firm sued SCA to enforce SCA’s express promise to pay counsel fees, asserting it was an intended third-party beneficiary of the SCA–Steir agreement.
Issues
- Whether a non-signatory law firm may enforce a corporation’s contractual promise to pay the firm’s fees as an intended third-party creditor-beneficiary.
- Whether a promisor may avoid payment under such a contract by imposing unilateral, extra-contractual conditions on the promised fee payments.
Decision
- The Supreme Judicial Court of Massachusetts reversed summary judgment for SCA and remanded.
- The court held the law firm was an intended beneficiary of the “creditor” type and could sue SCA directly to enforce the fee-payment promise.
- The court treated SCA’s post hoc conditions for payment as inconsistent with the agreement’s express undertaking to pay counsel fees for the specified matters.
Legal Principles
- An intended third-party beneficiary may enforce a contract directly against the promisor; a creditor-beneficiary is intended where the promised performance is meant to satisfy an obligation the promisee owes to the beneficiary.
- A beneficiary is “intended,” not incidental, when the contract’s terms and context show the parties contemplated that the promisor’s performance would be rendered to the beneficiary (including by direct payment).
- Allowing direct suit by an intended creditor-beneficiary avoids circuity of action and serves commercial efficiency.
- A promisor generally may not defeat an express contractual fee-payment undertaking by adding unilateral conditions not found in the agreement.
Conclusion
The court held that a law firm identified as the recipient of a corporation’s promised direct payment of an officer’s legal fees is an intended creditor-beneficiary and may sue the corporation directly to enforce that promise, vacating summary judgment for the corporation and remanding for further proceedings.