7.4 Defenses to Third-party Beneficiary Claims

• Library: Contract Law in Virginia (Virginia CLE) (2019 Ed.)

7.4 DEFENSES TO THIRD-PARTY BENEFICIARY CLAIMS

If a third-party beneficiary sues on a contract, is the beneficiary's recovery contingent on defenses available under the contract? The Virginia Supreme Court clearly says "yes." The court held in Ashmore v. Herbie Morewitz, Inc. ⁷¹ that "the third-party beneficiary's rights under the instrument . . . can rise no higher than the rights of the . . . covenantee or promisee under the instrument" ⁷² under section 55.1-119 of the Virginia Code.

[Page 244]

In Ashmore, the court held that the trial court had correctly ruled that Ashmore had proved that Morewitz, by misrepresenting the legal effect of the document, had fraudulently obtained Ashmore's signature on a subordination agreement. The agreement had subordinated Ashmore's lien of a purchase money deed of trust to a later lien of a deed of trust securing a note payable to Statewide, Inc. Ashmore sought a declaration that she was the holder of a first lien deed of trust on the property because there was no evidence that Statewide had any knowledge of the fraud.

The court explained that the subordination agreement clearly intended to confer a benefit upon Statewide, a nonparty—indeed, Statewide was even named in the instrument. Therefore, under section 55.1-119, Statewide ordinarily could enforce the subordination agreement against Ashmore. However, under the last sentence of section 55.1-119, which makes the same defenses that the promisor may have against the promisee available to it against the third-party beneficiary, "Statewide took its...