A contractor’s breach of contract claim against the company that created preliminary designs for a project should be dismissed because the contractor was not an intended beneficiary of the contract between the company and the owner of the project, a U.S. District Court judge in Massachusetts has decided.
While bidding on a project to design and rebuild schools and a health clinic, the plaintiff contractor had been told it needed to use the defendant’s preliminary designs, which were supposed to be at least 30 percent final. Because those plans turned out to be far less complete and otherwise severely flawed, the plaintiff claimed it lost almost $9 million in withheld progress payments and liquidated damages.
The plaintiff asserted seven causes of action, including a breach of contract claim grounded in the plaintiff’s alleged status as a third-party beneficiary of the contract between the defendant and the government agency that had hired it. The defendant then moved to dismiss the breach of contract claim.
“There are often many competing interests and parties working on construction projects, and to infer contractual liability where no such relationship exists would literally open a Pandora’s Box.”
— Hugh J. Gorman III, Boston
In ruling on the defendant’s motion, Judge Patti B. Saris noted that Massachusetts courts, leaning on the Restatement (Second) of Contracts, distinguish between “intended” and “incidental” beneficiaries, with only the former able to sue to enforce a contract.
Though it did not matter that the plaintiff had not been specifically named or identified at the time of the contract, there was no indication in the contract that the defendant and project owner had meant to account for the incidental benefit to the plaintiff from the defendant’s preliminary designs, Saris said.
Even if the language had been ambiguous, the plaintiff had not pleaded any facts from which such intent could be inferred, she continued. Especially in the construction context, third-party beneficiary status should not be conferred without a clear indication of such intent, Saris concluded.
Significant construction projects generally involve multiple, “inevitably intertwined” contracts to ensure the project is completed in a timely manner, Saris said. But that alone does not justify imposing third-party beneficiary duties.
“Unless a construction contract manifests a contrary intent, it will not create enforcement rights in a third party that separately contracts with the project owner,” Saris wrote in dismissing the plaintiff’s breach of contract claim.
The 14-page decision is Arco Ingenieros, S.A. de C.V. v. CDM International Inc.
Boston construction attorney Stanley A. Martin noted that the set of relationships among the plaintiff, defendant and project owner is not uncommon in the construction context.
“Within these kinds of contractual relationships, courts have simply not found third-party beneficiary status between the contractor and the design professional engaged by the owner,” he said.
Boston lawyer Hugh J. Gorman III said he agreed with Saris’ dismissal of the claim, given the lack of contract language conferring third-party beneficiary rights and the absence of any other evidence demonstrating an intention to make the plaintiff a third-party beneficiary.
While the distinction between an incidental and intended beneficiary may seem “harsh,” Gorman said, it is necessary in the construction context.
“There are often many competing interests and parties working on construction projects, and to infer contractual liability where no such relationship exists would literally open a Pandora’s Box,” he said.
David L. Fine of Worcester agreed.
“The construction industry is unique in the respect that, at any given point, there are dozens — if not hundreds — of contracts all intertwined, with all of the contractors on the project participating and working collaboratively toward a single deliverable to the owner,” he said.
Each of those contracts was negotiated at arm’s length, and all of the parties are relying to some degree on the others, he said.
If each of the myriad parties had standing to sue as an intended beneficiary of the others’ contracts, “it would really result in something untenable,” Fine said.
While there is room in the construction context for third-party beneficiary liability, Fine said, there would need to be stronger evidence that the parties acknowledge that a third party will be relying on the product of the contract — for instance, that a general contractor will be building off of final plans drawn up by an architect hired by the owner.
Gorman and Fine said often a contract between an architect and a project owner will contain language that clarifies that the architect is working exclusively for the owner, expressly disclaiming the creation of any rights in a third party. Such language can be a valuable risk-mitigation tool, Fine said.
Martin said it is a good idea to draft a contract to clarify that the designer is working solely for the owner’s benefit; many contracts do have such clauses, which can “head off at the pass” claims like those in the Arco case.
Martin added that he also routinely advises designers to be careful of how they define their scope of work, which can help circumscribe their tort liability.
The case offers a reminder of the need for a party in the plaintiff’s position to perform due diligence, reviewing all relevant documents and raising any concerns before agreeing to do the work, Fine said.
“As a design-build contractor, the time to protect yourself is during the contract drafting, pre-bid or pre-award,” he said.
During that period, the plaintiff presumably would have had the opportunity to ask questions and perhaps communicate directly with the defendant to allay any concerns about its preliminary plans, he said.
Without knowing more about the facts of the case, attorneys said they could not handicap the plaintiff’s non-contract-based claims.
One of the defendant’s attorneys, Michael T. Sullivan of Boston, declined to comment, citing the ongoing litigation.
The plaintiff’s attorneys did not respond to a request for comment.
Restoring El Salvador infrastructure
After Tropical Storm Ida devastated El Salvador in November 2009, the U.S. Agency for International Development hired plaintiff Arco Ingenieros, S.A. de C.V., the country’s oldest and one of its largest construction companies, to design and rebuild schools and a health clinic.
USAID required Arco to use preliminary designs that had been developed by Boston-based CDM International, which a year earlier had entered into a master contract with USAID to serve as its architect and engineering firm for projects worldwide.
On Dec. 8, 2011, CDM entered into a “task order,” which specified its duties as the architect-engineer for $25 million in USAID projects to rebuild El Salvador’s damaged infrastructure.
CDM was to conduct studies and assessments of each project site and create preliminary designs and technical specifications, which were to constitute at least 30 percent of the final designs for each facility.
CDM was also required to participate in the procurement process for design-build contractors like Arco. Those contractors would then use the preliminary designs to create final designs and reconstruct the facilities. CDM was also charged with supervising the work of the design-build contractors.
At USAID’s urging, Arco responded to a request for proposals from design-build contractors for eight schools and one health clinic. In doing so, it said it relied on CDM’s preliminary designs and representations that they constituted at least 30 percent of final designs for each project.
According to Arco’s complaint, it would soon learn that its reliance had been misplaced. The designs were defective and were also substantially less than 30 percent complete, Arco claimed.
The errors forced Arco to spend significant time and resources redrawing the designs. Arco also had to obtain new permits and conduct more excavation and demolition than it had planned.
The issues caused delays in Arco completing the project, and USAID withheld progress payments and assessed liquidated damages — to the tune of $9 million, according to Arco.
Arco filed suit against CDM on Nov. 9, 2018, alleging breach of contract, tortious interference with contractual relations, intentional misrepresentation, negligent misrepresentation, two forms of civil conspiracy, and unjust enrichment.
On Dec. 18, 2018, CDM moved to dismiss the breach of contract claim.
Contract language key
Saris noted that there have been circumstances in which courts have found a contractor to be an intended beneficiary of a construction contract, if the contract contains a provision indicating that the signatory was not to interfere with the contractor’s work or that it accepted liability for damage or delay. But that was not the case here.
“While the CDM Task Order contemplates that CDM International will work with the design-build contractor, it includes no provision indicating that the parties intended to impose liability on CDM International to ARCO for shoddy preliminary designs and delays,” she wrote.
Saris also found unpersuasive Arco’s reliance on the U.S. District Court’s 1987 decision in Chestnut Hill Development Corp. v. Otis Elevator Co., which addressed a claim by the owner-developer of a construction project that it was a third-party beneficiary of a contract between its contractor and a subcontractor.
In Chestnut Hill, there had been an open question about the parties’ intent, given that the owner-developer had picked the subcontractor, met with its employees, and ordered the general contractor to hire it, Saris noted.
“Here, ARCO is not the owner and has presented no allegations that support a reasonable inference that either USAID or CDM intended it to ‘benefit’ from the contract, as opposed to simply rely on it,” Saris wrote.