Breach of contract claims for payment are generally only enforceable against the person who you signed a contract with. However, there are some ways in which a third party may be on the hook for payment. Take, for example, a recent case out of the Delaware Superior Court, which held a lender liable for a contractor’s claim — despite the lack of contract between the parties.

Breach of contract & contractual privity

Breach of contract claims are usually pretty straightforward. A claim will typically involve three elements: a valid contract between the parties, one party failing to uphold their end of the deal (the breach), and the other party sustaining damages as a result of said breach. The first element is the main focus of this recent dispute.

Generally, in order to bring a breach of contract claim, the claimant must be a party to the contract, also referred to as “contractual privity.” However, there is one main exception to this rule: an intended third-party beneficiary. A third-party beneficiary is a party that was not part of the contract but still receives some benefit from the performance and completion of the contract. If this is the case, that third party can seek to enforce the contract in court.

But how does an “intended third-party beneficiary” come to be? A recent Delaware court shed some light on how this can happen when it held a lender was liable for payment to the contractor.

Contractor looks beyond the owner to recover payment

The case in question is BCD Associates, LLC v. Crown Bank.

Project Snapshot

  • Lender: Crown Bank (Crown)
  • Owner: MRPC Christiana, LLC (MRPC)
  • Contractor: BCD Associates, LLC (BCD)

This dispute arose out of a hotel renovation project owned by MRPC. To fund the project, MRPC entered into a nearly $13 million loan agreement with Crown. Subsequently,  BCD was brought on as the general contractor under an AIA contract.

The AIA contract stated upon submission of BCD’s invoices, Crown would review the invoice, approve the amounts, and pay BCD directly, minus 10% withheld by Crown as retainage.

Eventually, the project was completed (despite multiple issues) and a certificate of occupancy was issued. The problem was: BCD’s final invoice went unpaid, along with the withheld retainage amounting to an unpaid balance of $1,083,677.91.

In response, BCD went straight after the source of the project funding, filing a lawsuit against Crown under claims of breach of contract, unjust enrichment, promissory estoppel, and misrepresentation.

Lender owes contractor ‘contractually, factually, and practically’

Crown argued that because there was no contractual relationship between them and BCD, that any breach of contract claims would be improper. The court disagreed.

To start, the controlling documents in this case were the Loan Agreement and the Loan Commitment, which both stipulated that they would be governed and construed under New Jersey law. However, BCD wasn’t a party to either contract.

Furthermore, the Loan Agreement specifically states that there are “no third-party beneficiaries to the Agreement.”

So how did the court come to the conclusion that Crown had breached their contractual obligations to BCD?

Upon review of the third-party beneficiary statute in New Jersey, the court noted that a third-party beneficiary is defined as “[a] person for whose benefit a contract is made, either simple or sealed, may sue thereon in any court and may use such contract as a matter of defense in an  action against him although the consideration of the contract did not move from him.”

Using this definition, they looked to the loan documents and the actions of the parties. The Loan Agreement and Commitment were executed for the specific purpose of funding the renovation of the hotel, and recognized that MRPC would be retaining a contractor for the improvements. Furthermore, Crown was in charge of approving all invoices, paying BCD directly, and was withholding the retainage amounts from each payment. Essentially, since Crown had decided to “cut out the middleman,” they made BCD an intended third-party beneficiary.

This paragraph, straight from the opinion, sums up the rationale here:

“The controlling documents are the Loan Commitment and the Loan Agreement. The Court recognizes that BCD is not a named party in those agreements. Moreover, the Court acknowledges that the Loan Agreement specifically provides that there are no third-party beneficiaries to the Loan Agreement. But, contractually, factually and practically, BCD is the intended third-party beneficiary to the Loan Commitment and the Loan Agreement. Moreover, MRPC and Crown treated BCD as a third-party beneficiary to the applicable agreements.”

Thus, the court held that the third-party beneficiary contract claim was proper and Crown was ordered to pay the $1,083,677.91 owed to BCD. The court also upheld the unjust enrichment and promissory estoppel claims, but dismissed the misrepresentation claim.

Takeaways from BCD’s attorney on the case

Edward Seglias, one of the attorneys involved with this case, had this to say about the decision:

“Many of the issues at stake for BCD Associates in this case are familiar for contractors — unpaid contract balances and retainages from work on a commercial project. But often contractors deal with owners, not lenders or financial institutions, a difference which can greatly alter the payment and negotiation processes.”

“In this instance, the bank reneged on an agreement to pay the final balance, leading to litigation, something which all businesses want to avoid. Contractors would be wise to sort out early on (even before work begins) where payment is coming from, payment schedules, and how disputes will be resolved. Carefully worded contractual provisions may help mitigate potential issues related to payment as well.”