Third-Party Claims Require Proof of Privity of Contract

Aug 30, 2018

Indiana court outlines the criteria needed to allow a third-party claim against a subcontractor

Privity of contract is required to successfully pursue a claim for breach of contract.

An issue that often arises is whether an owner can file a claim against a subcontractor who has contracted with the prime contractor but not directly with the owner.

Courts decide this issue based upon whether an owner is a third-party beneficiary. Kent Holland’s article in ConstructionRisk.com outlines the reasoning of the U.S. District Court for the Northern District of Indiana in finding that privity of contract did exist in City of Whiting v. Whitney, Bailey, Cox & Magnani, LLC, (U.S. District Court, N.D. Indiana, March 20, 2018).

The city entered into a contract with American Structurepoint, Inc. to provide engineering “to develop a waterfront property along Lake Michigan.”

American Structurepoint “subcontracted with Whitney … to design a rock revetment along the shoreline for protection. The revetment failed three times according to the city’s complaint.”

The city, after settling with Structurepoint, filed suit against Whitney “to recover additional damages.” Whitney filed for summary judgment claiming lack of privity of contract. The court rejected the defendant’s argument.

It explained that there are three things that must be proven to allow a complaint for breach of contract to go forward. “’A plaintiff must show: (1) [a] clear intent by the actual parties to the contract to benefit the third party; (2) [a] duty imposed on one of the contracting parties in favor of the third party; and (3) [p]erformance of the contact terms is necessary to render the third party a direct benefit intended by the parties to the contract.’”

The court found the city provided evidence that met the burden of proof for all three criteria.

Source—

Third Party Beneficiary Claim against Subcontractor, Kent Holland, ConstructionRisk.com, June, 2018