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In re A Certain Demand for Arbitration by Hylte Bruks Aktiebolag and Nymolla

decided: July 24, 1968.


Lumbard, Chief Judge, and Smith and Anderson, Circuit Judges. Lumbard, Chief Judge, concurring.

Author: Anderson

ANDERSON, Circuit Judge:

Nymolla, AB, the plaintiff-appellant, brought suit in the Southern District of New York against the Babcock & Wilcox Company (B & W) to recover $836,000 for an alleged breach of a contract between B & W and Hylte Bruks Aktiebolag (Hylte Bruks) which the plaintiff claimed was for its benefit. B & W moved, pursuant to 9 U.S.C. §§ 3 and 6 for an order staying the suit pending arbitration. The district court found that Nymolla was not a third party beneficiary of the contract and was not a proper party either to participate in the arbitration proceedings or to maintain the suit. It, therefore, dismissed Nymolla's action with prejudice and ordered B & W and Hylte Bruks to proceed forthwith to arbitrate.

In 1959 Hylte Bruks, a Swedish corporation, contracted with B & W, a New Jersey corporation, for the purchase of a magnesium bi-sulfite recovery system to be installed by B & W in a mill to be constructed at Ivetofta, Sweden, hereinafter called the Nymolla Mill. The contract contained a standard provision for arbitration,*fn1 a clause providing that the contract could neither be assigned nor the conditions thereof modified "except by a duly approved agreement signed by both parties,"*fn2 and a provision that New York law should govern the interpretation of the contract.

On November 10, 1960, Mr. Olson of B & W wrote to Mr. Holgersson, Managing Director of Hylte Bruks, stating that he had "first noted" that Hylte Bruks had "apparently * * * formed a new company Nymolla AB, for this project." While Mr. Olson expressed his appreciation of "sound financial reasons behind this move," he noted that "from a purely legal standpoint * * * our boiler contract is with Hylte Bruks AB and that in the contract there is a restriction on transferring the Hylte Bruks AB obligation to any other corporate entity." In the reply letter from Hylte Bruks, Mr. Holgersson, who was also Managing Director of Nymolla, stated that: "The boiler contract and the license agreement being closed between yourselves and Hylte Bruks AB, we do not suggest to have them transferred to the new company but would like you to note that Nymolla AB when discussing with you various aspects on the contract and the agreement is dealing as Hylte Bruks AB's representative."

By September, 1962, the recovery system was fully delivered and installed and the Nymolla pulp mill was ready for operation. It is the claim of Hylte Bruks and Nymolla that this system proved to be defective in several respects. Efforts were made to adjust the differences between the parties, including the element of damages, but without success. On April 19, 1967, a demand for arbitration was filed by Hylte Bruks and Nymolla, addressed to B & W, claiming B & W's breach and negligence in performance of its contract with Hylte Bruks. One week later, counsel for B & W wrote to counsel for Hylte Bruks and Nymolla and raised the question of Nymolla's standing to participate in the arbitration as a party claimant on its own behalf. Thereafter, on June 20th, B & W moved to stay the arbitration "for so long as Nymolla, AB is a party thereto * * *." In a letter dated October 17, 1967, addressed to the American Arbitration Association, Nymolla sought unilaterally to withdraw the demand for arbitration. B & W refused, however, to consent to the attempted withdrawal,*fn3 and on October 24th Nymolla consented to the granting of the motion to stay the arbitration proceedings for such time as it remained a party, and an order to that effect was entered by the district court.

The present action was commenced on October 17, 1967, and a copy of the complaint was served on B & W on October 31st. The complaint contained two causes of action, each alleging claims based solely upon the Hylte Bruks -- B & W contract; the first claimed a loss of profits because of defective operation and the second claimed a breach of warranty. On November 29, 1967, B & W made a motion in the district court for a stay of the action at law, pending arbitration. After holding a hearing on the motion, the district court found that the parties were in a "procedural cul-de-sac" and said,

"In order to obviate the necessity of the court being subject to further proceedings in this matter, and to satisfy the court's sole interest of having the merits of the dispute disposed of as expeditiously as possible, the rights and relationships of the parties will be decided on this motion."

Nymolla had sought to show by affidavits and various exhibits that it was a third party beneficiary of the contract between Hylte Bruks and B & W. The trial court held as a matter of law that Nymolla was not a third party beneficiary.*fn4 It further decided that the real issue was Nymolla's standing to bring a suit and held that it had no such standing and therefore dismissed the action with prejudice. It directed B & W and Hylte Bruks to proceed forthwith to arbitrate. We affirm.

On the evidentiary material before it and on Nymolla's claims of law the district court was justified in rejecting Nymolla's assertion that it was a third party beneficiary of the B & W and Hylte Bruks contract. Nymolla was not in existence at the time the contract was made nor was it expressly or by implication mentioned in any way. It relies, however, upon reports of oral conversations at and subsequent to the making of the contract and certain correspondence which show that there were dealings between itself and each of the contracting parties, of which all had knowledge, relative to the delivery and installation of the recovery system in Nymolla's pulp plant in the course of its construction. Nymolla argues that, while the required contractual intent to benefit a third party may be found in the language of the contract, it is not necessary for the creation of rights in a third party that such a party be identified either by name or by reference in the language of the contract, because it may equally well be shown from the facts and circumstances surrounding the execution of the contract. See 2 Williston, Contracts, § 378 (3d ed.). But this is only so where the language of the contract shows that it was entered into for the benefit of a third party, Beveridge v. New York Elevated R. Co., 112 N.Y. 1, 26, 19 N.E. 489, 496, 2 L.R.A. 646, (1889); Resinol v. Valentine Dolls, Inc., 14 A.D.2d 853, 220 N.Y.S.2d 884 (1st Dept. 1961); see also, 10 N.Y. Juris. Contracts, § 241, p. 164, even though it may not specifically identify the party and even though the party is not then in existence, Coster v. Mayor of Albany, 43 N.Y. 399 (1870); Solmo v. Rosenberg, 31 Misc.2d 911, 221 N.Y.S.2d 56 (Sup. Ct. Nassau Co. 1961), or that the contract could not be performed without having the benefit fall to a particular third person.

"It is not sufficient that the performance of the covenant may benefit a third person. It must have been entered into for his benefit, or at least such benefit must be the direct result of performance and so within the contemplation of the parties.

The agreement under which the third party claims must clearly express an intention to assume a direct duty to him. It is essential not merely that the contract shall operate for the benefit of the third person, but that it shall have been so intended."

10 N.Y. Juris, Contracts, § 239, p. 162.

In the present case, the agreement between Hylte Bruks and B & W expressly precluded the use of extrinsic evidence by a third party who would seek to maintain a legally enforceable right in the contract.*fn5 The only part of the contract, to which Nymolla makes reference, as proof of intent to benefit a third party is the caption on its cover which includes the words "for the Ivetofta Mill." But this geographical designation does not suffice, even though Nymolla's assertion may be correct, that the "Ivetofta Mill and the Nymolla Mill are the same." The separate licensing agreement between B & W and Hylte Bruks, on which Nymolla also relies, actually lends support to B & W's contention that the caption refers only to the Parish in Sweden where the mill was to be constructed. There is nothing about the terms of the contract which require or show an intent on the part of B & W or Hylte Bruks to confer a benefit on Nymolla or any unnamed third party; rather, the right to performance runs explicitly and exclusively to Hylte Bruks. "It needs no argument to show that a third party ...

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