“Can They Really Sue Me: Third Party Claims Against Contractors for Defective Work”
By: Joseph C. Blanner, Esq.
McCarthy, Leonard & Kaemmerer, LC
Construction work may ultimately benefit someone other than the party that hires the
contractor. In the residential context, a home, condominium or loft will often be purchased by an
end user. The end user is the “beneficiary” of the construction work in some sense. An owner on
a commercial project is the end user and “beneficiary” of the subcontractors work. The general
contractor and subcontractors are “beneficiaries” of the architect and engineers work even though
these design professionals may have contracted with the owner.
So, if the work is performed defectively, can that end user of the work or third party, who
was not specifically a party to the contract, file a lawsuit for breach of the contract? In the legal
world, this is known as a “third-party beneficiary”.
“A third party beneficiary is one who is not privy to a contract or its consideration but one
to whom the law gives the right to maintain a cause of action for breach of contract.” Dave Kolb
Grading, Inc. v. Lieberman Corporation, 837 S.W.2d 924, 939 (Mo.App. E.D. 1992); see also
Ernst v. Ford Motor Co., 813 S.W.2d 910, 922 (Mo.App. W.D. 1991).
“Not in privy” is a
legalese way of saying that the third party was not a party to the contract. In some instances the
law will give those individuals who did not sign the contract a cause of action for a breach of the
contract.
So, under what circumstances does the law give a third party a claim for breach of contract?
Not every party that may derive some benefit from the contract of another is entitled to assert a
claim based on its terms. Rather, “[o]nly third parties for whose primary benefit the contracting
parties intended to make the contract may maintain an action.” Id. at 940. (Emphasis added).
Thus, the actual parties to the contract had to intend to benefit the third party.
The Courts typically look to the contract itself to determine whether the parties intended to
benefit the third party. OFW Corporation v. City of Columbia, 893 S.W.2d 876, 878 (Mo.App.
1995) quoting from Wilson v. General Mortgage Co., 638 S.W.2d 821, 823 (Mo.App. 1982).
“Although it is not necessary that the third party beneficiary be named in the contract, the terms of
the contract must express directly and clearly an intent to benefit an identifiable person or class.”
Kansas City N.O. Nelson Co. v. Mid-Western Construction Company of Mo., 782 S.W.2d 672, 677
(Mo.App. W.D. 1989). Thus, the intention of the parties to a construction contract to benefit a
specific party or a group to which that party belongs must be clearly and unambiguously stated in
the contract itself.
“In the absence of such an express declaration [of an intent to benefit certain third-parties],
there is a strong presumption that the parties contracted only for themselves and not for the
benefit of others.” OFW Corporation, 893 S.W.2d at 879; citing State ex rel. William Ranni
Associates, Inc. v. Hartenbach, 742 S.W.2d 124, 141 (Mo.banc 1987); See also JTL Consulting,
LLC v. Shanahan, 190 S.W.3d 389, 399 (Mo.App. E.D. 2006); Nitro Distributing, Inc. v. Dunn,
194 S.W.3d 339, 345 (Mo. en banc. 2006).
Additionally, “[t]he court may not speculate from the language in the contract as to whether
the contracting parties intended to make the plaintiff a third-party beneficiary.” OFW Corporation,
893 S.W.2d at 879. Thus, the Court may not go outside of the clear intent set forth in the
construction contract to speculate as to whether a party is an intended third-party beneficiary.
A good example of a contract clause that expresses the intent to only be for the benefit of
the parties to the contract is contained in AIA Document A201-1997, General Conditions of the
Contract for Construction, at Section 1.1.2, which states,
“The Contract Documents form the Contract for Construction. The Contract
represents the entire and integrated agreement between the parties hereto and
supersedes prior negotiations, representations or agreements, either written or oral.
The Contract may be amended or modified only by a Modification. The Contract
Documents shall not be construed to create a contractual relationship of any kind
(1) between the Architect and Contractor; (2) between the Owner and a
Subcontractor or Sub-subcontractor; (3) between the Owner and Architect; or (4)
between any persons or entities other than the Owner and Contractor.”
In the following sections, this article will set forth the conclusions reached by
various Courts regarding third party beneficiary claims. However, it should be noted that
each specific case is going to depend on the language of the contract at issue. So, while
Courts may have determined that certain parties were not entitled to assert claims as third
party beneficiaries, this is because the contracts that were at issue in the cases did not
express the intent of the parties to benefit the third party.
I.
Is a Condominium Unit Owner a Third-Party Beneficiary of the Contract
between the General Contractor and the Developer?
Several Courts have found that condominium unit owners are not third-party beneficiaries
of construction contracts between the condominium developer and the contractor or
subcontractors. Board of Managers v. Schorr Brothers Development Corp., 182 N.Y.S.2d 258,
259 (N.Y. Sup. Ct. 1992). In the Schorr Brothers case, a New York Court found that condominium
purchasers were not third party beneficiaries of contract between developer and contractor.
Similarly, in 155 Harbor Drive Condominium Association v. Harbor Point Incorporated, 568
N.E.2d 365, 374 (Ill. Ct. App. 1991), an Illinois Court found that condominium unit owners could
not maintain a lawsuit against a general contractor as third party beneficiary of the contract with
the developer. The Court reached the same conclusion in Waterford Condominium Association v.
Dunbar Corporation, 432 N.E.2d 1009, 1011 (Ill. Ct. App. 1982).
II.
Is a Commercial or Residential Owner a Third Party Beneficiary of the
Construction Contract between the Prior Owner and the Contractor?
Courts have also found that owners are not third-party beneficiaries of construction
contracts between the prior owner and contractor. In Altevogt v. Brinkoetter, 421 N.E.2d 182 (Ill.
1981), the purchaser of home was found by the Court not to be a third-party beneficiary of the
construction contract between the prior homeowner and the builder. The same conclusion was
reached in Foxcroft Townhome Owner’s Association v. Hoffman Rosner Corporation, 435 N.E.2d
210 (Ill. Ct. App. 1982), where the Court found that subsequent purchasers of condominium units
were not entitled to bring a lawsuit as third-party beneficiaries of the construction contract between
the developer and builder. A similar result was reached in Elsander v. Thomas Sebold &
Associates, Inc., (Mi. Ct. App. 2008), where the Court concluded that a subsequent purchaser of a
home was not a third-party beneficiary of the contract between the original homeowner and
contractor. While many of these cases deal with a subsequent purchaser of a residence, the same
principle would apply in the commercial context.
III.
Is an Owner a Third Party Beneficiary of the Contract between the General
Contractor and Subcontractor?
Courts have also determined that owners are not third-party beneficiaries of contracts
between the contractor and subcontractor. In East v. Galebridge Custom Builders, Inc., 839 S.W.2d
720 (Mo.App. E.D. 1992), the Missouri Court of Appeals found that purchasers of a home could
not sue the masonry subcontractor or concrete supplier for breach of the contract between the
homebuilder and these parties as a third-party beneficiary. Similarly, in Grgic v. Cochrane, 689
S.W.2d 687 (Mo.App. E.D. 1985), the Court concluded that a home purchaser could not sue the
builder’s subcontractor as a third-party beneficiary to the subcontract agreement.
Other Courts have reached the same conclusion on both commercial and residential
projects. See Cahill v. Lazarski, 641 N.Y.S.2d 124 (N.Y. Sup. Ct. 1996) (Purchaser of home could
not sue subcontractor as third-party beneficiary between builder and subcontractor); Ball
Corporation v. Bohlin Building Corp., 543 N.E.2d 106, 108 (Il. Ct. App. 1989) (Property owner
not third-party beneficiary of contract between general contractor and subcontractor where express
provision indicated that contract that contract was not for its benefit); Shroyer v. County of
Mecklenburg, 571 S.E.2d 849 (N.C. Ct. App. 2002) (“North Carolina case law clearly holds that a
landowner is not a third-party beneficiary to a subcontract between the builder and one of the
builder’s subcontractors”).
IV.
Is a Subcontractor a Third Party Beneficiary of the Contract between the
General Contractor and the Owner?
Just as the Courts have determined that an owner has no claim against a subcontractor on
the contract, Courts have also found that subcontractors are not third-party beneficiaries of
contracts between the owner and general contractor. In Port Chester Electrical Construction Corp.
v. Atlas, 389 N.Y.S.2d 327, 330 (N.Y. Ct. App. 1976), the Court ruled that a subcontractor was
not the third-party beneficiary of the contract between the contractor and owner. Similarly, in
State v. Osborne, 607 P.2d 369 (Alaska 1980), an employee of the homebuilder who provided
labor could not recover against the homeowner as a third-party beneficiary of contract between the
homebuilder and the homeowner. Again, the same principle would apply in the context of a
commercial project.
V.
Is the General Contractor a Third Party Beneficiary of the Contract between
the Architect or Engineer and the Owner?
Generally, general contractors have been held not to be third-party beneficiaries of the
contract between the owner and architect. In Valley Landscape Company, Inc. v. Rolland, 237
S.E.2d 120 (Va. 1977), the Court determined that the services of an architect in contract with the
owner were for the owner’s benefit and, as such, the contractor could not be a third-party
beneficiary. In A.R. Moyer, Inc. v. Graham, 285 So.2d 397 (Fla. 1973), the Court stated, “…a
contractor is an incidental beneficiary [who may not recover under the contract between architect
and owner] absent clear intent manifested in the owner architect contract”.
Several other Courts have reached the same conclusion. See Dynamic Construction
Company v. Barton Malow Company, 543 N.W.2d 31 (Mi. Ct. App. 1995) (Contractor not thirdparty beneficiary of contract between architect and owner); Collins Co. v. City of Decator, 533
So.2d 1127, 1132-1134 (Ala. 1988) (owner-architect contract did not create third-party beneficiary
rights in contractor); Richardson Associates v. Lincoln-Devore, Inc., 806 P.2d 750 (Wy. 1991)
(Architect and mechanical engineer not third-party beneficiary of contract between owner and soil
testing lab relating to construction); Northgate Electric Corp. v. Barr & Barr, Inc., [INSERT
CITATION] (N.Y. Sup. Ct. 2009) (Subcontractor could not assert a claim as third-party
beneficiary to contract between owner and architect even though architect new plans would be
relied upon by subcontractor); Detweiler Bros. v. John Graham & Co., 412 F.Supp. 416, 419 (E.D.
Wash. 1976); SME Industries, Inc. v. Thompson, Ventulett, Stainback and Associates, Inc., 28 P.3d
669 (Utah 2001) (Contractors not third-party beneficiaries of contract between design
professionals and owner); Linde Enterprises, Inc. v. Hazelton City Authority, 602 A.2d 897 (Penn.
1992).
While the Courts in the cases referenced above did not find that the third party was entitled
to file a lawsuit on the contract, the determination in each case depended on the specific language
of the contract that was at issue in the case. Each of the Courts examined the terms of the contract
to determine whether the party was a third party beneficiary.
Based on the foregoing, a contractor should carefully examine the contract being used on
a particular project prior to execution to determine whether any party or identifiable class of parties
could assert a claim against the contractor as a third party beneficiary.