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Federal Court Rules Contractor Is Not Intended Third-Party Beneficiary under Owner-Engineer Agreement

Economic

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In March, a Massachusetts federal court addressed whether a design-builder contractor could recover for breach of contract under an intended third-party beneficiary theory against a design firm hired by the project owner to complete 30% designs. In Arco Ingenieros, S.A. DE C.V. v. CDM International Inc., a Salvadoran contractor entered into a design-build agreement with the U.S. government to build eight schools and a health clinic in El Salvador as part of a hurricane relief effort.

The design-build agreement included 30% designs, which were to form the design criteria for the project. The agency had contracted separately with a U.S. engineering firm via a task order to complete the 30% designs. After construction started, the contractor alleged the designs provided by the agency were defective and did not actually constitute 30% designs. Ultimately, the contractor filed suit against the agency and the engineer. As one theory of liability, the contractor claimed to be a third-party beneficiary under the task order between the agency and the engineer. The engineer moved to dismiss the contractor’s complaint arguing that the contractor was not an intended third-party beneficiary under the task order.

The federal court agreed and entered an order dismissing the contractor’s breach-of-contract claim against the engineer. The court reasoned that nothing in the task order evidenced an intent that the engineer’s design work was to benefit the contractor. While the contractor may have been an incidental beneficiary of the task order, the task order language provided that the engineer’s express purpose under the agreement was to provide design services to the government agency only. The statements in the separate design-build agreement that the contractor could rely on the 30% designs produced under the task order did not alter the task order’s intent. The court found this approach consistent with other federal decisions holding that general contractors are generally not intended beneficiaries of owner-architect agreements.

While not surprising, the federal court’s decision in this matter demonstrates the complexity of commercial contract disputes in the construction industry. With owners, engineers, contractors, and subcontractors all entering into different interrelated agreements, there is always potential that a particular contract or subcontract will be detrimentally impacted by another party’s failure to perform under a different agreement on the project. For owners, they can manage these risks by making all downstream parties insert language into their contracts that shows the owner is an intended third-party beneficiary.

For contractors, engineers, and other parties that are more parallel in the contracting hierarchy, it may be more difficult to contract around these risks. A contractor can mitigate this risk by seeking indemnification or other protection from the owner or other direct contractual party for interference, negligence, or delays by non-parties. Additionally, the design-builder contractor here could have considered the 30% designs more closely, rather than relying on the owner’s representations, and the contractor could have requested an opportunity to review the design task order to evaluate the risks of relying on potentially defective design criteria. If you have more questions about bringing contract claims as a third-party beneficiary, please feel free to contact Aman Kahlon.

 

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