Contractor can’t sue as third-party beneficiary

From Massachusetts Lawyers Weekly, Kris Olson reports that a contractor cannot sue the client of the party with which the contractor had an agreement. Kim writes:

A contractor’s breach of contract claim against the company that created preliminary designs for a project should be dismissed because the contractor was not an intended beneficiary of the contract between the company and the owner of the project, a U.S. District Court judge has decided.

While bidding on a project to design and rebuild schools and a health clinic, the plaintiff contractor had been told it needed to use the defendant’s preliminary designs, which were supposed to be at least 30 percent final. Because those plans turned out to be far less complete and otherwise severely flawed, the plaintiff claimed it lost almost $9 million in withheld progress payments and liquidated damages.

The plaintiff asserted seven causes of action, including a breach of contract claim grounded in the plaintiff’s alleged status as a third-party beneficiary of the contract between the defendant and the government agency that had hired it. The defendant then moved to dismiss the breach of contract claim.

In ruling on the defendant’s motion, Judge Patti B. Saris noted that Massachusetts courts, leaning on the Restatement (Second) of Contracts, distinguish between “intended” and “incidental” beneficiaries, with only the former able to sue to enforce a contract.

Though it did not matter that the plaintiff had not been specifically named or identified at the time of the contract, there was no indication in the contract that the defendant and project owner had meant to account for the incidental benefit to the plaintiff from the defendant’s preliminary designs, Saris said.

Even if the language had been ambiguous, the plaintiff had not pleaded any facts from which such intent could be inferred, she continued. Especially in the construction context, third-party beneficiary status should not be conferred without a clear indication of such intent, Saris concluded.

Significant construction projects generally involve multiple, “inevitably intertwined” contracts to ensure the project is completed in a timely manner, Saris said. But that alone does not justify imposing third-party beneficiary duties.

“Unless a construction contract manifests a contrary intent, it will not create enforcement rights in a third party that separately contracts with the project owner,” Saris wrote in dismissing the plaintiff’s breach of contract claim.

The 14-page decision is Arco Ingenieros, S.A. de C.V. v. CDM International Inc., Lawyers Weekly No. 02-183-19. The full text of the ruling can be found here.

Contract language key

Saris noted that there have been circumstances in which courts have found a contractor to be an intended beneficiary of a construction contract, if the contract contains a provision indicating that the signatory was not to interfere with the contractor’s work or that it accepted liability for damage or delay. But that was not the case here.

“While the CDM Task Order contemplates that CDM International will work with the design-build contractor, it includes no provision indicating that the parties intended to impose liability on CDM International to ARCO for shoddy preliminary designs and delays,” she wrote.

Saris also found unpersuasive Arco’s reliance on the U.S. District Court’s 1987 decision in Chestnut Hill Development Corp. v. Otis Elevator Co., which addressed a claim by the owner-developer of a construction project that it was a third-party beneficiary of a contract between its contractor and a subcontractor.

In Chestnut Hill, there had been an open question about the parties’ intent, given that the owner-developer had picked the subcontractor, met with its employees, and ordered the general contractor to hire it, Saris noted.

“Here, ARCO is not the owner and has presented no allegations that support a reasonable inference that either USAID or CDM intended it to ‘benefit’ from the contract, as opposed to simply rely on it,” Saris wrote. MLW

Read the full story at Contractor can’t sue as third-party beneficiary – Massachusetts Lawyers Weekly

Massachusetts Map

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.