Opinion ID: 516924
Heading Depth: 1
Heading Rank: 2

Heading: Third Party Beneficiary Claims

Text: 34 It must first be determined whether the district court erred as a matter of law by holding that Nemours was a third party beneficiary of the Gilbane-Pierce subcontract. 3 Since this issue involves only a question of law the standard of review is plenary. This being a diversity of citizenship case brought pursuant to 28 U.S.C. Sec. 1332, this and the other substantive issues are controlled by Delaware law. 35 It is well settled in Delaware that a third-party may recover on a contract made for his benefit.... But in order for there to be a third party beneficiary, the contracting parties must intend to confer the benefit. Ins. Co. of North America v. Waterhouse, 424 A.2d 675, 679 (Del.Super.1980). The intent to confer a third party beneficiary benefit is to be determined from the language of the contract. Oliver B. Cannon & Sons, Inc. v. Dorr-Oliver, Inc., 336 A.2d 211, 215 (Del.1975); Royal Indemnity Co. v. Alexander Industries, Inc., 8 Storey 548, 58 Del. 548, 211 A.2d 919, 920 (1965.) 36 Thus in the present case an intent to confer third party beneficiary status on Nemours must be gleaned from the language of the Gilbane-Pierce subcontract. The language of a contract, however, cannot be divorced from the context in which it was written. Here, we are dealing with a general contract and a subcontract in the construction industry. 37 Typically when major construction is involved an owner has neither the desire nor the ability to negotiate with and supervise the multitude of trades and skills required to complete a project. Consequently an owner will engage a general contractor. The general contractor will retain, coordinate and supervise subcontractors. The owner looks to the general contractor, not the subcontractors, both for performance of the total construction project and for any damages or other relief if there is a default in performance. Performance and the payment of damages are normally assured by the bond of a surety on which the general contractor is principal and the owner is the obligee. 38 The general contractor, in turn, who is responsible for the performance of the subcontractors, has a right of action against any subcontractor which defaults. Performance and payment of damages by a subcontractor are normally assured by the bond of a surety on which the subcontractor is principal and the general contractor is the obligee. 39 Thus the typical owner is insulated from the subcontractors both during the course of construction and during the pursuit of remedies in the event of a default. Conversely, the subcontractors are insulated from the owner. The owner deals with and, if necessary, sues the general contractor, and the general contractor deals with and, if necessary, sues the subcontractors. 40 These typical construction contract relationships have long been recognized: 41 [Contracts between a principal building contractor and subcontractors] are made to enable the principal contractor to perform; and their performance by the subcontractor does not in itself discharge the principal contractor's duty to the owner with whom he has contracted. The installation of plumbing fixtures or the construction of cement floors by a subcontractor is not a discharge of the principal contractor's duty to the owner to deliver a finished building containing those items; and if after their installation the undelivered building is destroyed by fire, the principal contractor must replace them for the owner, even though he must pay the subcontractor in full and has no right that the latter shall replace them. It seems, therefore, that the owner has no right against the subcontractor, in the absence of clear words to the contrary. The owner is neither a creditor beneficiary nor a donee beneficiary; the benefit that he receives from performance must be regarded as merely incidental. 42 A contractor entered into a contract with the Government, the latter promising to pay the cost plus a fixed fee and assenting to the letting of subcontracts. In such a case it is clear, in the absence of evidence of a different intention, that the subcontractor is not a beneficiary of the Government's promise to the contractor to pay the cost, even though the amount payable to the subcontractor is reckoned as part of the cost. The Government made no promise to pay anything to the subcontractors. For similar reasons, the Government is not a beneficiary of a subcontractor's promise to the contractor, even though the performance promised may enable the contractor to perform his contractual duty to the Government. 43 4 Corbin on Contracts Sec. 779D (1951 ed.) at 46, 47. 44 These typical construction relationships are also recognized in Delaware law. In Cannon the Delaware Supreme Court referred to the buffer zone which a general contract creates between the owner and a subcontractor, although in that case it found that the language of the subcontract evidenced an intent to extinguish the buffer zone. 336 A.2d at 216. 45 There is nothing to prevent a departure from the typical pattern, and, as was the case in Cannon, a contractor and subcontractor may agree to confer upon an owner rights which are enforceable directly against the subcontractor. However, an intent to do so must be found in the contract documents. Thus in the present case it must be determined whether the Gilbane-Pierce subcontract evidences an intent on the part of both Pierce and Gilbane to depart from the typical owner-general contractor and general contractor-subcontractor relationships to confer upon Nemours a direct right of action against Pierce. 46 The overall structure of the contractual relationships in this case falls into the traditional mold. Nemours as owner entered into a general contract with Gilbane. Gilbane's obligations were assured by a performance bond issued by Aetna. Gilbane entered into a number of subcontracts, including the one with Pierce. Each subcontractor's obligations were assured by a performance bond, a performance bond issued by Federal in the case of Pierce. If indeed Gilbane intended that the subcontract create an obligation running directly from Pierce to Nemours, it is curious that it accepted (in fact, prescribed) a performance bond which provided that no right of action would accrue on it to or for the use of any person other than Gilbane. 47 The language of the Gilbane-Pierce subcontract suggests that Gilbane and Pierce contemplated that Pierce was to be obligated to Gilbane, not to Nemours. 48 The subcontract is between Pierce, as subcontractor, and Gilbane as the contractor. Section 6 specified Gilbane as the entity to which Pierce was to be responsible: The Subcontractor agrees to be bound to the Contractor by the terms and conditions of the Agreement ... and to assume toward the Contractor all the obligations and responsibilities that the Contractor, by these documents, assumes toward the Owner. (Emphasis added.) 49 Section 7(f) of the subcontract provides that if Pierce fails to perform, Gilbane may provide labor, equipment or materials or may terminate Pierce and complete the work itself. Section 38E of the Special conditions provides that the subcontractor's payment and performance bond shall name Gilbane as obligee. 50 Exhibit A to the general contract, which of course is evidence of Gilbane's intent, provides that [t]he Contractor shall have sole and total responsibility for completing the [general] contract ... and is responsible to the Owner for the full, proper, and timely performance of all work under the contract. (Emphasis added.) Article 4.3.2 of the General Conditions provides that [t]he Contractor shall be responsible to the Owner for the acts and omissions of his employees, Subcontractors and their agents and employees.... (Emphasis added.) 51 Of significance is the incorporation of the standard AIA General Conditions of the Contract for Construction into both the general contract and the subcontract. Article 1.1.2 of the General Conditions provides: 52 Nothing contained in the Contract Documents shall create any contractual relationship between the Owner or the Architect and any Subcontractor or Sub-subcontractor. 53 Nemours urges that in light of the definition of Contract Documents in Article 1.1.1, the Article 1.1.2 language serves only to preclude the general contract from creating a contractual relationship between Nemours as owner and Pierce as subcontractor but does not preclude the subcontract from creating such a relationship. Article 1.1.2 provides that [n]othing contained in the Contract Documents shall create any contractual relationship between the Owner ... and any Subcontractor.... (Emphasis added.) As defined in Article 1.1.1, however, Contract Documents does not include the subcontract and, therefore, Nemours argues, there is no prohibition against the subcontract creating a third party beneficiary relationship between Nemours and Pierce. 54 If the Article 1.1.2 language appeared only in the general contract, Nemours' argument might be persuasive. However, there was repeated incorporation of the General Conditions and its Article 1.1.2 language into the subcontract. 55 At page 1A of the subcontract it is provided that all work thereunder shall be in accordance with General Conditions of the Contract for Construction, in (sic) Specifications, (AIA Document A201--1976 Edition). In Section 6, referred to above, Pierce as subcontractor agrees to be bound by the General Contract and the General Conditions for Construction. Section 7(g) provides that [t]he Terms and Provisions herein contained and the General Conditions For Construction (AIA Document A201--1976 Edition) ... shall supersede all previous communications, representations, or agreements, either oral or written, between the parties hereto with respect to the subject matter hereof. 56 This repeated incorporation of the General Conditions and its Article 1.1.2 no contractual relationship language is a strong indication of an intent on Gilbane's and Pierce's part to maintain the separate owner-general contractor and general contractor-subcontractor relationships. 57 No Delaware court appears to have construed general contracts or subcontracts which contain Article 1.1.2 of the AIA General Conditions or comparable language. Decisions in other jurisdictions, however, have held that this provision (or like language) prevents an owner from maintaining a breach of contract action against a subcontractor on a third party beneficiary theory, or prevents a subcontractor from maintaining a breach of contract action against an owner on such a theory. Thus the buffer is preserved by Article 1.1.2 or its equivalent. E.C. Ernst, Inc. v. Manhattan Constr. Co. of Texas, 551 F.2d 1026 (5th Cir.1977), cert. denied, 434 U.S. 1067, 98 S.Ct. 1246, 55 L.Ed.2d 769 (1978) (subcontractor asserted it was a third party beneficiary under the general contract); Honey v. George Hyman Construction Co., 63 F.R.D. 443 (D.D.C.1974) (insurer subrogated to rights of owner asserted it was a third party beneficiary of the subcontract between the general contractor and the subcontractor); Federal Mogul Corp. v. Universal Constr. Co., 376 So.2d 716 (Ala.Civ.App.1979), cert. denied, 376 So.2d 726 (Ala.1979) (owner sought to recover from a subcontractor on a third party beneficiary theory). 58 In Honey the general contract included a General Condition which provided that [n]othing contained in the specifications or drawings shall be construed as creating any contractual relationship between any subcontractor and the Owner. The General Condition did not specifically preclude a subcontract from creating a contractual relationship between owner and subcontractor, but the court held nevertheless that incorporation of the General Condition by reference in the subcontract clearly indicates that [the subcontractor] intended to avoid any contractual obligation to [the owner]. 63 F.R.D. at 450. 59 Similarly in Federal Mogul Corp. the general contract included a General Condition of the Contract for Construction which provided that [n]othing contained in the contract documents shall create any contractual relation between any subcontractors and the owners. Here too the General Condition did not specifically preclude a subcontract from creating a contractual relationship between owner and subcontractor, but again the court held that by virtue of its incorporation in the subcontract the language of the instant documents expressly pre-empts the creation of third party contract rights in [the owner]. 376 So.2d at 724. See also dicta in G & P Electric Co. v. Dumont Construction Co., 194 Cal.App.2d 868, 15 Cal.Rptr. 757, 763 (1961). 60 Nemours' principal argument in support of its third party beneficiary theory is that the Gilbane-Pierce subcontract contains numerous provisions which evidence an intent that Nemours be benefited by Pierce's performance. The description of Pierce's work in Section 1 provides that it shall be subject to the supervision and satisfaction of the contractor and the owner. There are a number of other provisions which impose obligations on Pierce vis-a-vis Nemours, such as an obligation to furnish Shop Drawings, Erection Drawings, etc. for Nemours' approval, the requirement that Pierce indemnify and save harmless Nemours from any expense, liability or loss arising from patent, copyright or trademark infringement. 61 In every construction subcontract the owner is the one which ultimately benefits from its performance. However, this does not create a third party beneficiary relationship. 62 Nemours relies heavily on Oliver B. Cannon & Sons, Inc. v. Dorr-Oliver, Inc., supra, in which the court held that in the circumstances of that case the various provisions of the subcontract benefiting the owner demonstrated an intent by the parties to the subcontract that the owner be a third party beneficiary of the subcontract. The result in that case turned on the ascertainment of the parties' intent. What distinguishes the present case from Cannon is Pierce's and Gilbane's expressed intent that there be no third party beneficiary relationship between Pierce and Nemours. For the same reason Sears, Roebuck and Co. v. Jardel Co., 421 F.2d 1048 (3d Cir.1970) (applying Pennsylvania substantive law) is inapplicable. 63 Until the execution of the settlement agreement between Nemours and Gilbane, the actions of all three parties affirmed the absence of a contractual relationship between subcontractor and owner. In its September 9, 1980 letter to Gilbane approving the Gilbane-Pierce subcontract, Nemours wrote nothing herein shall be deemed or construed to create any contractual relationship between The Nemours Foundation and said subcontractor [Pierce]. During the period when disputes about performance of the contract had developed Nemours looked to Gilbane and Gilbane alone with respect to completion of Pierce's work under the subcontract. The manner in which the contract litigation was instituted and initially prosecuted and defended evidenced the understanding of Nemours, Gilbane and Pierce that no contractual relationship existed between Nemours and Pierce. 64 We conclude that the subcontract does not manifest an intent by Pierce and Gilbane to confer third party beneficiary status upon Nemours. In fact, the subcontract evidences an intent to preclude such a status. Nemours and Gilbane were but two of three parties in a relationship carefully structured by contract (the general contract and the subcontract). Pierce was the third party in that relationship. By means of the settlement agreement Nemours and Gilbane, in effect, sought to change that relationship to give Nemours a previously non-existent direct cause of action against Pierce. Without Pierce's participation that was not possible. Contractual rights cannot be so casually disregarded. 65 Thus to the extent that the judgment of the trial court rests upon Nemours' third party beneficiary claim it must be reversed.