Virginia Supreme Court allows third-party beneficiary action.

The Virginia Supreme Court allowed the seller of a small business to sue Ernst & Young, the CPA firm of the business's buyer, under a third-party beneficiary theory.

In September 1987, HAZCO International, Inc., a chemical waste-disposal company whose sole shareholder was William Ward, entered into discussions with Chemical Waste Management (CWM) over HAZCO's sale. Ernst conducted both a yearend 1986 audit and a midyear 1987 review of HAZCO. After the parties consummated the deal, CWM discovered "discrepancies" in preacquisition account balances resulting in an overstatement of assets and an understatement of liabilities. Ward conducted an independent evaluation of CWM's claim and concluded accounting errors had accorded his stock an inflated value. Ward authorized the escrow agent for the sale to pay CWM $500,000 from the escrow account established for the sale.

Based on this payment and the alleged accounting errors, Ward filed suit against Ernst, asserting he was a third-party beneficiary of the contract between HAZCO and the accounting firm. The trial court ruled the parties had not intended to make Ward a third-party beneficiary of the contract and dismissed his claim.

On appeal, Ward argued the trial court had erred by ruling as a matter of law that he was not a third-party beneficiary of the HAZCOErnst contract. HAZCO's president testified that Ernst had been "aware from the very first" that the audit was crucial to the negotiations. HAZCO's controller testified that she had had several conversations with Ernst's employees including a discussion in which she read excerpts from the written draft of the stock purchase agreement under consideration by Ward and CWM. Before the sale, HAZCO's head of finance had attended a meeting with Ernst to discuss the issue of deferred revenues--the exact area in which the error was later discovered--leading to the payment from the escrow account to CWM.

Based on this evidence and the fact that Ward, as sole owner of HAZCO stock, was the primary beneficiary of the benefits to be conferred on execution of the contract, the court ruled the trial court had erred in dismissing Ward's claim and remanded the case to the trial court for a rehearing on Ward's motion. (William Ward v. Ernst & Young, Record no. 921107 Va. Sup. Ct. 9/17/93).