Opinion ID: 1334973
Heading Depth: 2
Heading Rank: 2

Heading: Third-party beneficiary breach of contract claim

Text: Sloan contends that failure to comply with statutory bonding requirements gives rise to a third-party beneficiary breach of contract claim by the subcontractor against the government. [6] Sloan therefore argues that the trial court erred in dismissing its breach of contract claim against SCDOT based on lack of privity. We agree, finding Judge Richard Posner's reasoning in A.E.I. Music Network, Inc. v. Business Computers, Inc., 290 F.3d 952 (7th Cir.2002) instructive on this matter. In A.E.I. Music, a federal district court was asked to determine the nature of an unpaid subcontractor's breach of contract claim against the city school board for failing to require a contractor on a school construction project to post a payment bond as required by the Illinois Bond Act. The Bond Act provided in relevant part that in contracts for public work, [the contracting state agency] shall require every contractor for the work to furnish, supply and deliver a payment bond to the State in favor of subcontractors. 30 Ill. Comp. Stat. Ann. 550/1. The court determined that because no bond had been in place to begin with, the subcontractor's suit against the school board was not a suit on the bond under the Bond Act. A.E.I. Music, 290 F.3d at 954. Rather, the court characterized the action as a third-party beneficiary suit for breach of contract because the Act's bond requirement was read into every construction contract of a public entity, and therefore, became a term of the contract between the school board and the general contractor. Id. at 955. Because the term was intended to benefit the general contractor's subcontractors, the subcontractor was a direct third-party beneficiaryas opposed to an incidental beneficiaryand therefore entitled to enforce the bond requirement. Id. The A.E.I. Music court's discussion contained numerous policy-based theories for characterizing a subcontractor as a direct third-party beneficiary with the right to sue on the primary contract. Judge Posner explained that the statutory bond requirement was a contractual term incorporated by the legislature, and therefore, the relevant intentions in determining whether a third party could enforce the contract pursuant to the third-party beneficiary doctrine were no longer those of the parties but those of the legislature. Id. at 955-56. In creating a bond requirement, Judge Posner determined that the legislature intended public works construction contracts to protect subcontractors. Because subcontractors would be the only ones with an interest in enforcing this contractual term, carrying out the legislature's intent required enabling this protected class to enforce the contract. Id. at 956. Accordingly, the court held the subcontractor's claim sounded in common law as a claim for breach of contract. [7] Id. at 957. We find the A.E.I. Music court's analysis is equally applicable in this case. Recognizing that the underlying goals of the Procurement Code serve important public interests concerning this particular contractual relationship, this Court has held that contracts formed pursuant to the Procurement Code are deemed to incorporate the applicable statutory provisions and such provisions shall prevail over conflicting contractual provisions. Unisys Corp. v. S.C. Budget & Control Bd., 346 S.C. 158, 171, 551 S.E.2d 263, 271 (2001). Although not located in the Procurement Code, the SPPA is generally applicable to public procurement. Therefore, we find that an incorporation of the SPPA's bonding requirements into public works contracts is consistent with this Court's reasoning in Unisys Corp. Even without reference to the Procurement Code, the SPPA serves important public interests in its own right. Seeking to protect subcontractors' payment rights on government projects encourages competitive bidding, which results in the most economically efficient use of tax dollars and other sources of public funding. Accordingly, we hold that the bonding requirements of the SPPA are incorporated into construction contracts governed by the statute. Finally, we find that under established contract law in South Carolina, subcontractors have enforceable rights as third-party beneficiaries to construction contracts incorporating the SPPA. See Bob Hammond Constr. Co., Inc. v. Banks Constr. Co., 312 S.C. 422, 424, 440 S.E.2d 890, 891 (Ct.App.1994) (noting that where a contract between two parties is intended to create a direct benefit to a third party, the third party may enforce the contract). Because the legislature intended to protect contractors by creating bonding requirements, and because the subcontractors are the only ones with a financial stake in enforcing the bond requirements, subcontractors are direct third-party beneficiaries to the contract between a government entity and a general contractor to which the SPPA is applicable. For this reason, the government may be liable to a subcontractor for breach of contract for failing to comply with the SPPA bonding requirements. Accordingly, we hold that a government agency's failure to secure and maintain statutory bonding as required by the SPPA gives rise to a third-party beneficiary breach of contract action by a subcontractor.