The basic concept of contract law is that if a party breaches a contract, the other parties to the agreement have a claim against the breaching party. This is called having privity. Recently though, courts have started to allow non-party claims against breaching parties. This has come to be known as the third-party beneficiary doctrine. This doctrine is used when trying to determine what parties actually intended with a contract. If a third-party is meant to benefit from a contract, then they may have the right to enforce that contract. You can see where this may come into play within the construction industry. The construction industry is made up of multiple contracts that affect parties not actually named in the contract. Here are a few examples.
In the California case Sessions Payroll Management v. Noble Constr. Co, Sessions was not a signatory party to a contract between Noble and Mackey. Sessions brought a breach of contract claim against Noble, which it lost. The case became a battle over attorneys fees. The contract allowed for prevailing parties in a dispute involving the contract to be awarded attorneys fees. Sessions claimed Noble was not entitled to this benefit. The court did not agree, stating
Where a plaintiff did not sign the contract with the attorney fee provision, a defendant which is the prevailing party can recover contractual attorney fees only if the nonsignatory plaintiff would have been entitled to those fees if the plaintiff had prevailed. A third-party beneficiary can only claim benefits that contracting parties intended it to receive, and cannot recover benefits intended to benefit only contracting parties. The contract does not show that Mackey and Noble intended to benefit Sessions by including Sessions within the contractual attorney fee clause. Therefore even if Sessions had prevailed on its third party beneficiary cause of action, it could not have claimed attorney fees under the contract. Thus we conclude that Noble was not entitled to attorney fees as prevailing party.
This decision is extremely important because it acknowledges that third-party breach of contract claims are allowed.
Another California case went and broke against the majority rule in the construction industry: a property owner is not an intended beneficiary of a subcontract. In Giblert Financial Corp. v. Steelform Contracting Co., the property owner contracted with a general contractor for construction work. This contractor entered a into a subcontract with a roofer. After the project was finished, the roof began to leak, and the property owner sued the roofer for breach of contract.
The court went through a transitive property-type reasoning. They stated that the contract between the owner and GC required the GC to furnish all the material and labor necessary to construct the building. The GC subcontracted with the roofer to furnish materials and labor necessary to construct the roof. Therefore, Gilbert is the ultimate beneficiary and the third-party beneficiary doctrine applies.
How To Protect Yourself From Surprises
Although many other courts have discounted the third-party beneficiary doctrine concerning construction cases, the possibility still exists that you can face a claim from a party you did not contract with. There is a way to prevent any surprises from occurring. Simply make sure the terms of your contract are clear. Your contract should expressly state that third-party beneficiaries do or do not have rights under your contract. The determination will then not be left up to the courts, and you can better prepare for situations that may arise.
Understand that placing a clause like this in your contract is not full proof. If a flow-down clause is found in your contract, things could become complicated. A flow-down clause applies terms of another contract, like one between an owner and a GC, to terms of another contract, like a subcontract. Even with a third-party beneficiary clause, a flow-down clause may afford third-parties certain rights under your contract anyways.
Either way, the third-party beneficiary clause will still be beneficial because it will limit and make clear the amount of rights being afforded. It is always best to have things like this in writing. Otherwise, it can come down to a court decision. Save some time and money. Make your contract airtight.