In contract law there is a well-recognized exception to the rule requiring “privity of contract” as a prerequisite to recovery for breach. If you are a “third party beneficiary” of someone else’s contract, you can recover for its breach even though you are not a party to it – as long as the contracting parties so intended.
“A third-party beneficiary relationship exists if: (1) the contract calls for a performance by the promisor, which will satisfy some obligation owed by the promisee to the third party; or (2) the contract is so expressed as to give the promisor reason to know that a benefit to a third party is contemplated by the promisee as one of the motivating causes of his making the contract.” Brooks v. Trustees of Dartmouth College, 161 N.H. 685, 697 (2011). If we look no further than this language, the first of these two methods of establishing third party beneficiary status appears to be a perfect fit in the usual owner-contractor-subcontractor relationship: through his subcontract, the subcontractor (promisor) is rendering a performance that the general contractor (promisee) owes to the owner. So does the second: subcontracts almost always tell the subcontractor (promisor) that a benefit to the owner is what the general contractor (promisee) has in mind in paying the subcontractor to perform.
But there is a gloss on this description of the test; the contract must also indicate “that the parties considered the third party’s legal status and intended to confer upon him a right to sue the promisor.” Id. An intent to benefit a third party and an intent to give that third party the right to sue for breach are very different things. Because both are needed to give someone a right to sue for breach of another’s contract, property owners will generally not be considered third-party beneficiaries of contracts between their general contractor and its subcontractors. They will merely be incidental beneficiaries, with no contract right of recovery against the subcontractors.
The main benefit to an owner in having a valid breach-of-contract claim against a subcontractor is avoidance of the "economic loss rule" precluding recovery for the subcontractor's negligent performance (see Blog # 29). Without the right to an assignment of the subcontract in the event of default by the general contractor (see Blog # 39), there may be no mechanism for an owner to recover damages directly from the guilty party -- or at all, if the general goes under.
Ordinarily, intent can be either express or implied from surrounding circumstances. In discerning an intent to allow an owner to sue for breach of a subcontract, however, courts around the country typically insist that it be express. “The commentators and courts that have considered the question have concluded that unless the contract specifically so provides, the owner is an incidental beneficiary of the contract between the subcontractor and the contractor.” Lazovitz, Inc. v. Saxon Construction, Inc., 911 F.2d 588, 591 (11th Cir. 1990). No reported New Hampshire case has yet so declared, but it is a safe bet that a subcontract’s silence on the point will weigh heavily against finding third party beneficiary rights.
One way to dispel all doubt is to insert language in the subcontract disclaiming any intent to allow the owner a right to sue for its breach. See Hrushka v. State Dept. of Public Works, 117 N.H. 1022, 1024 (1977) (“[I]f two contracting parties expressly provide that some third party who will be benefited by performance shall have no legally enforceable right, the courts should effectuate the expressed intent by denying the third party any direct remedy.”). Interestingly, the popular AIA A401 (2017) subcontract form provides in section 1.5 that "The Subcontract documents shall not be construed to create a contractual relationship of any kind . . . (2) between the Owner and the Subcontractor, or (3) between any persons or entities other than the Contractor and Subcontractor." But it also provides in section 4.6.1 that the subcontractor's warranty extends "to the Owner, Architect and Contractor" -- which presumably gives the owner the right to sue the subcontractor for breach of warranty. How this apparent inconsistency shakes loose remains to be seen.
“A third-party beneficiary relationship exists if: (1) the contract calls for a performance by the promisor, which will satisfy some obligation owed by the promisee to the third party; or (2) the contract is so expressed as to give the promisor reason to know that a benefit to a third party is contemplated by the promisee as one of the motivating causes of his making the contract.” Brooks v. Trustees of Dartmouth College, 161 N.H. 685, 697 (2011). If we look no further than this language, the first of these two methods of establishing third party beneficiary status appears to be a perfect fit in the usual owner-contractor-subcontractor relationship: through his subcontract, the subcontractor (promisor) is rendering a performance that the general contractor (promisee) owes to the owner. So does the second: subcontracts almost always tell the subcontractor (promisor) that a benefit to the owner is what the general contractor (promisee) has in mind in paying the subcontractor to perform.
But there is a gloss on this description of the test; the contract must also indicate “that the parties considered the third party’s legal status and intended to confer upon him a right to sue the promisor.” Id. An intent to benefit a third party and an intent to give that third party the right to sue for breach are very different things. Because both are needed to give someone a right to sue for breach of another’s contract, property owners will generally not be considered third-party beneficiaries of contracts between their general contractor and its subcontractors. They will merely be incidental beneficiaries, with no contract right of recovery against the subcontractors.
The main benefit to an owner in having a valid breach-of-contract claim against a subcontractor is avoidance of the "economic loss rule" precluding recovery for the subcontractor's negligent performance (see Blog # 29). Without the right to an assignment of the subcontract in the event of default by the general contractor (see Blog # 39), there may be no mechanism for an owner to recover damages directly from the guilty party -- or at all, if the general goes under.
Ordinarily, intent can be either express or implied from surrounding circumstances. In discerning an intent to allow an owner to sue for breach of a subcontract, however, courts around the country typically insist that it be express. “The commentators and courts that have considered the question have concluded that unless the contract specifically so provides, the owner is an incidental beneficiary of the contract between the subcontractor and the contractor.” Lazovitz, Inc. v. Saxon Construction, Inc., 911 F.2d 588, 591 (11th Cir. 1990). No reported New Hampshire case has yet so declared, but it is a safe bet that a subcontract’s silence on the point will weigh heavily against finding third party beneficiary rights.
One way to dispel all doubt is to insert language in the subcontract disclaiming any intent to allow the owner a right to sue for its breach. See Hrushka v. State Dept. of Public Works, 117 N.H. 1022, 1024 (1977) (“[I]f two contracting parties expressly provide that some third party who will be benefited by performance shall have no legally enforceable right, the courts should effectuate the expressed intent by denying the third party any direct remedy.”). Interestingly, the popular AIA A401 (2017) subcontract form provides in section 1.5 that "The Subcontract documents shall not be construed to create a contractual relationship of any kind . . . (2) between the Owner and the Subcontractor, or (3) between any persons or entities other than the Contractor and Subcontractor." But it also provides in section 4.6.1 that the subcontractor's warranty extends "to the Owner, Architect and Contractor" -- which presumably gives the owner the right to sue the subcontractor for breach of warranty. How this apparent inconsistency shakes loose remains to be seen.
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