91视频

Whether building a dream vacation home, renovating an existing commercial structure or developing a multimillion-dollar mixed-use project, negotiating construction contract language in 2017 can have important consequences years into the future. The obligations and rights arising from one often overlooked clause, addressing contractual 鈥渢hird-party beneficiaries,鈥� can vary considerably from state to state and even case to case. Those inconsistencies make it prudent to address the issue at contract formation in order to manage the potential risk inherent in blind agreement to default form contract language.

Legal dictionaries define a 鈥渢hird-party beneficiary鈥� (TPB) as 鈥渁 person or entity who, though not a party to the contract, stands to benefit from the contract鈥檚 performance.鈥� Typically, the TPB needs to be expressly named as such in the contract from which it stands to benefit. For example, if a contractor and a subcontractor agree to a subcontract that specifies the subcontractor will render some performance to a project for the express benefit of the owner as a TPB, then that owner is a third-party beneficiary of the subcontract, even though it is not a party to the subcontract. TPB status can also be granted to prime design professionals from sub-consultants or to general contractors from sub-subcontractors or suppliers to a subcontractor.

The benefits gained from TPB status can be substantial. In the example above, the owner may assert claims directly against the subcontractor for breach of the subcontract, breach of warranty, negligence, or other claims arising out of the subcontracted work for the project. This allows the owner flexibility to pursue the potentially liable parties efficiently and directly rather than having to first seek recourse from its prime contractual partner, the general contractor. These direct rights can also help avoid an economic loss rule defense by the offending party (the economic loss doctrine generally provides that a party cannot recover in negligence for its purely 鈥渆conomic loss鈥� 鈥� i.e., not personal injury or property damage). There are risks, however, because a TPB clause, if not drafted correctly, could grant unintended rights, such as giving a subcontractor direct claims against the owner, or a general contractor direct claims against a project lender.

Interestingly, default form contract language is largely silent on the TPB issue. The AIA鈥檚 B101-2017 Owner-Architect Agreement states at section 10.5, 鈥淣othing contained in this agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the owner or architect,鈥� but does not address the reverse TPB situation. Also, word searches for third-party beneficiary language in the AIA鈥檚 A102 and A201-2017 Owner-Contractor Agreement and general conditions turn up similarly short. This means the parties are left to the applicable law of the project鈥檚 location, and those laws can vary considerably from state to state.

In Oregon, fortunately for owner parties, the Supreme Court has ruled (in Harris v. Suniga) that where an owner, even as a remote purchaser, can demonstrate actual property damage rather than purely economic loss, the economic loss rule does not bar a negligence claim for construction defects. Thus, even if an owner is not a TPB of a subcontract in Oregon, that owner may have direct rights of recovery against a subcontractor for actual property damage to the owner鈥檚 property.

In Washington, the situation is different. That state鈥檚 Supreme Court decided in a pair of 2010 cases (Eastwood v. Horse Harbor Foundation Inc. and Affiliated FM Ins. Co. v. LTK Consulting Services Inc.) to rebrand the economic loss rule as the 鈥渋ndependent duty doctrine.鈥� It provides that 鈥渁n injury is remediable in tort (i.e., negligence), if it traces back to the breach of a tort duty arising independently of the terms of the contract.鈥� In the context of a defective construction case, Washington courts have explained there is no independent duty to avoid economic loss, 鈥渄efined as a mere defect in the bargained-for quality,鈥� absent an independent duty or other risk of harm (see Eastwood and Nichols v. Peterson NW Inc.). These cases suggest that in Washington, without a TPB clause, the upstream party needs to show an independent duty or harm separate from the construction defect in order to maintain a direct action against a non-contracting construction party.

And in Utah, we find the rule directly opposite to that in Oregon. The Utah Legislature has codified the economic loss doctrine to make it clear that 鈥渁n action for defective design or construction is limited to breach of contract,鈥� including written and oral agreements for 鈥渂oth express and implied warranties.鈥� Absent a TPB clause in a Utah contract then, an owner has little recourse against a construction party with whom it lacks privity of contract.

Given the variety of legal applications, and the silence of default form language, the oldest advice remains the best: If you want something done right, do it yourself. At the time of negotiating your next construction contract, consider adding your own third-party beneficiary clause that sets out all parties鈥� expectations that the ultimate beneficiary of the work being performed shall have direct rights of action against downstream subcontractor or sub-consultant parties in order to directly hold each party accountable for deficiencies in that party鈥檚 work. Protect your rights, and don鈥檛 leave your contracts open to default terms and the risk of unintended consequences.

Andrew Gibson is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9878 or [email protected].