LAW: THE CONTRACTOR'S SIDE: Part of the party

Decision makes project owners third-party beneficiaries

Blog Entry

Larry Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction.

Printer-friendly version

A basic tenet of contract law has always been that only parties to a contract may sue and be sued for breach of duties arising out of the contract.
For example, a subcontractor typically cannot sue an owner for the latter’s breach of the prime contract. Conversely, the owner cannot sue the subcontractor for a breach of the subcontract with the prime contractor. If the subcontractor performed poorly on the project, the owner may look only to the prime contract to determine whether the subcontractor’s performance constitutes a breach, and if so, it may proceed only against the prime contractor.
A narrowly carved exception to the above rule is for third-party beneficiaries. A third-party beneficiary is someone to whom the contracting parties intend to confer a benefit. The parties must generally intend that one or both of the contracting parties assumes a direct obligation to the third party when they signed their contract. For this reason, absent an express provision in a construction contract conferring third-party beneficiary status to a third party, the conventional wisdom has been that a project owner cannot sue a subcontractor and vice versa. Well, unless you are in Sussex, Del.
State of Delaware Department of Transp. v. Figg Bridge Eng.’s, Inc., et al., 2011 Del. Super. LEXIS 507 (Nov. 9, 2011) involved the widely publicized Indian River Inlet Bridge replacement project, which was a design-build project. After completion of the bridge and roadway approaches, unusual settlement occurred and DelDOT incurred significant costs removing and replacing embankment (and presumably roadway). DelDOT brought suit against the prime contractor and also sued a geotechnical consultant to the prime contractor. Although DelDOT had no direct contract with the consultant, it claimed to be a third-party beneficiary of the subcontract between the prime and the consultant. The consultant filed a motion with the Superior Court of Delaware (Sussex County) challenging the third-party beneficiary status and seeking dismissal of the suit on the grounds DelDOT was not a party to its subcontract with the prime.
In the background discussion, the court noted that the prime contract specifically named the consultant as the entity that provided the geotechnical services in connection with the design. Thus, I began to think that the court was going to focus on the distinctions between a design-build contract, which typically involves the qualification of design-build teams and the naming of the various entities participating in the project within the prime contract, and a typical design-bid-build contract, which characterizes all duties as being performed by the prime contractor. However, in its analysis, the court was silent on these matters and, instead, focused on several provisions in the subcontract that are fairly typical in the industry in all subcontracts, including (1) the express reference in the subcontract to the prime contract and the owner; (2) specific reference to the geotechnical scope of work as described in the prime contract; (3) the requirement that the consultant perform all work in accordance with the prime contract and that the provisions of the prime contract govern the essential aspects of the consultant’s work under the subcontract; and (4) a provision that tied the prime’s payment to the consultant upon payment by DelDOT to the prime. The court concluded that these provisions evidenced an intent by both parties of the subcontract to create rights in DelDOT for enforcing the consultant’s performance duties and, therefore, DelDOT is a third-party beneficiary.
This decision effectively makes all project owners third-party beneficiaries. As this appears to be the first case in Delaware ruling that a project owner is a third-party beneficiary under these circumstances, other local courts in Delaware are free to follow the case or decide to the contrary. It will be interesting to see if the case is appealed to a higher court in Delaware, and if so, this writer believes it will be overturned. R&B

Overlay Init