If I was to tell you that someone was a third-party beneficiary, you would think that person was having some kind of wild night, and you would hope that they had a designated driver. However, in the law there is a phrase in contracts that is important to builders, and it is called a “third-party beneficiary.” What that means is that someone who is not a party to a contract may nevertheless be a “beneficiary” of the contract, if they are an intended beneficiary.
Let’s define that with a real-life example. Third-party beneficiary in an example that is relevant to builders might be a contract that states:
“Sub-concrete company hereby agrees to provide all flatwork for the Homeowner Jones’ project required by general for the sum of $10,000.”
Now, of course, a real contract would have a lot more details than that. In this scenario, the Joneses would only be what is called “incidental” beneficiaries of the contract, and they would have no rights to enforce any of the agreement. If the wording were changed, for instance the phrase “for the benefit of the homeowners” were inserted into the contract, then the Joneses would be considered “third-party” beneficiaries. This is important because, as third-party beneficiaries, they could enforce the contract. If the sub’s work was below standard, not only could the general enforce the contract, but so could the Joneses. The flipside is that if the Joneses were only “incidental,” then the courts (just last month) came out with an opinion stating that the Joneses could not sue the subcontractor for breach of contract. That’s right: The homeowners could not sue the sub.
The courts specifically held that a third person cannot maintain an action upon a simple contract merely because he or she would receive a benefit from its performance or would be injured by its breach. The courts stated that third-party beneficiary status requires an express promise to act for the benefit of the third party. The courts went on to say that:
“absent clear contractual language to the contrary, a property owner does not attain third-party beneficiary status merely because the parties to the subcontract knew, or even intended, that the construction would ultimately benefit the property owner.”
This seems like good news for subcontractors, particularly those subcontractors who might be performing sub-par work. Perhaps this was not the best public policy decision, but sometimes the law does not make sense.
Besides being a past President of the Home Builders Association of the Grand Traverse Area and a licensed contractor, Robert Whims is an attorney at Whims Legal Group, PLC, located at 12935 S. West Bay Shore Drive, Traverse City, MI 49684. Telephone: 231-938-6099; Facsimile: 231-421-6686; E-mail: rwhims@whimslaw.com