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An engineer under contract to a federal agency (USAID) provided preliminary designs (the bridging documents) for a design-build project that the owner then provided to the contractor to complete the final designs for the project and then construct it. The contractor filed a breach of contract suit against the engineer for alleged defects in the 30 percent design documents, which it asserted caused it to spend time and resources to redraw, obtain new permits, conduct additional excavation, soil compaction, and hydrogeological studies and demolishing more structures than it anticipated. The contractor alleged it was a third-party beneficiary of the engineer’s contractual obligation to USAID to conduct adequate site assessments and prepare preliminary designs for the projects. Engineer’s motion to dismiss the suit was granted because the court found the contractor lacked third party beneficiary status. Arco Ingenieros, S.A. de C.V. v. CDM International, Inc., 368 F. Supp. 3d 256 (District Ct., Mass. 2019).

In bidding for the design-build contract, the court states that the contractor relied on the preliminary designs and on representations by USAID and the engineer that the designs constituted at least thirty percent of the final designs for each project. According to the court, after starting its work, the contractor claims it learned that the preliminary designs were substantially less that third percent complete, “failed to follow building-code requirements, and did not account for soil-condition and subsurface issues, … failed to address flooding requirements, lacked a plan for bio-infectious waste disposal, and did not identify that the annex to the clinic was structurally unsound.”

There is no discussion in the court decision concerning why 30 percent preliminary design documents should have necessarily accomplished any of the items mentioned above. When documents are only preliminary bridging documents, it is not reasonable for a contractor to expect to be entitled to rely upon to contain level and extent of design details expected in final Construction Documents that are 100 percent complete. Because the court granted the engineer’s motion to dismiss for lack of standing, it didn’t have to address these more substantive issues.

Analysis of Third Party Beneficiary Status

Massachusetts’ courts have adopted the Restatement (2d) of Contracts approach to determining third party beneficiary status under which not every party that derives a benefit from a contract can sue to enforce that contract. The key is whether that entity is an “intended” beneficiary or merely an “incidental” beneficiary.

For a party to quality as an intended beneficiary, “the language and circumstances of the contract” must show that the parties to the contract “clearly and definitely” intended the non-party to benefit from the promised performance.

Under general contracting principles, a third party is not necessarily precluded from being an intended beneficiary “simply because it is not specifically named in the contract.” The court explained that, “If the contract language does not clearly evince the contracting parties’ intent, courts consult extrinsic evidence about the circumstances surrounding the contract.” With construction projects, however, the requirements for proving third party beneficiary rights are stricter.

Here the court explained,

“The caselaw on point from other jurisdictions does not support third-party beneficiary status in the construction context without a clear indication of intent. This is because significant construction projects generally involve multiple contracts that are “inevitably intertwined” to ensure the project is completed in a timely manner according to the agreed-upon specifications…. 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.”

In this particular case, the court concluded that while the engineer’s contract with the project contemplated that the engineer would work with the design-build contractor, it included no provision indicating that the parties intended to impose liability on the engineer to the contractor for defects in the preliminary designs or for delays.

Risk Management Comment: (1) To avoid any chance of a contractor successfully asserting that it was an intended third party beneficiary under a design professional’s contract with a project owner, it may be prudent to include a simple clause in the design professional contract clearly stating that there shall be no third party beneficiaries under the contract. (2) Because we are seeing so many claims by design-build contractors asserting that the design firm’s preliminary designs were inadequate or defective, it may be prudent to add a clause in the design firm contract stating that the designs are only preliminary and will be judged only by what can reasonably be expected of preliminary designs, and that they are not expected to be as accurate or complete as 100 percent complete Construction Documents.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 22, No. 2 (Feb 2020).

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