Opinion ID: 1610742
Heading Depth: 2
Heading Rank: 2

Heading: The third-party beneficiary claims

Text: Collins argues that it was a third-party beneficiary of the agreements between the City and EPA and the City and Krebs, and that any breach of contract by the City or Krebs entitled Collins to breach of contract remedies. To recover under a third-party beneficiary theory, the complainant must show: 1) that the contracting parties intended, at the time the contract was created, to bestow a direct benefit upon a third party; 2) that the complainant was the intended beneficiary of the contract; and 3) that the contract was breached. Sheetz, Aiken & Aiken, Inc. v. Spann, Hall, Ritchie, Inc., 512 So.2d 99, 101-02 (Ala.1987). (Citations omitted.) If the benefit to the third person is not intended to be a direct benefit, but rather to be merely an incidental benefit, the third person will not be entitled to damages based on a breach of that contract. Mills v. Welk, 470 So.2d 1226, 1228 (Ala.1985). Here, the trial court stated that Collins, claiming benefit, had to show that the contract was ... directly for [its] benefit or [it] was ... incidental[ly] to [its] benefit or in construing the whole contract from its four corners [it] was for [Collins's] benefit. Collins argues that the trial court erred in its application of the law because it failed to consider, in addition to the contracts themselves, the surrounding circumstances known to the parties. Anderson v. Howard Hall Co., 278 Ala. 491, 179 So.2d 71, 75 (1965). Defendants respond by saying that the contracts themselves are the best evidence of the intentions of the parties at the time of contracting, and that where it is plain upon the contract's face that no direct benefits were intended for the third person, then the third person is merely an incidental beneficiary and may not recover. See, Sheetz, Aiken & Aiken, Inc. v. Spann, Hall, Ritchie, Inc., 512 So.2d 99 (Ala.1987) (it was clear from the express language of the contract that the parties did not intend to bestow a direct benefit upon the third person). We agree and hold, therefore, that courts must look to the surrounding circumstances of the transaction only when the contract is unclear as to whether the contracting parties intentionally conferred upon a third person a direct benefit; consequently, the court's inquiry may stop when it determines from the face of the contract that the parties did not intend to confer upon the third person a direct benefit. The purpose of the City-Krebs contract is expressed in its first few paragraphs. The City desired to construct certain additions and improvements, which complied with state and federal requirements, to the Dry Creek facility. To achieve this end, the City hired Krebs to advertise for bids from contractors for construction of the project; to prepare the necessary contract documents; and to manage construction and inspect structures as the project progressed. Nothing in the stated purpose of the City-Krebs contract reflects an intent to confer any direct benefits upon the contractor. Because the City obtained a grant from the EPA to finance the improvements to the wastewater treatment facility, the City and Krebs were required to agree that their contract was subject to certain federal regulations. Krebs was bound to render all services required to complete the task in accordance with applicable EPA regulations. In the contract, Krebs agreed that the construction work on the water treatment plant would be subject to labor-standards provisions. These provisions included the Davis-Bacon Act and implementing regulations of the Secretary of Labor and the EPA. One of the labor regulations required contractors to submit weekly a copy of all payrolls and a statement verifying that the wage rates contained therein were not less than those determined by the Secretary of Labor. While Krebs assumed a duty to ensure that the contractor supplied this information, the contract does not indicate that Krebs assumed a duty to ensure that Collins's wage rates complied with federal requirements. In accordance with the regulations and appendix incorporated into Krebs's contract with the City, Krebs prepared a contract for the City and the contractor. By entering into that contract, Collins agreed that it would comply with the provisions of the Davis-Bacon Act and other applicable federal requirements. Thereafter, Krebs supplemented the addendum to the City-Collins contract with current wage rate decisions to be reviewed by Collins to assist in its compliance with the federal wage rate requirements. While agreeing that the construction at Dry Creek would be subject to these federal requirements, neither the City nor Krebs expressed an intent to confer a direct benefit upon Collins by accepting responsibility for fines and back-wage assessments in the event Collins failed to comply with its promise to the City to adhere to the wage rate requirements in the Davis-Bacon Act. Two specific provisions in Appendix C-1 of the City-Krebs contract clearly reflect that these parties did not intend to grant legally enforceable rights to Collins. First, in subparagraph (d) of part 2, the City and Krebs agreed that Krebs would be liable for damages caused by Krebs's negligent performance of any of the services furnished under this agreement, except for errors, omissions or other deficiencies to the extent attributable to the Owner, Owner furnished data or any third party. We have previously held that this kind of provision does not bestow benefits directly on third persons. See, Sheetz, 512 So.2d at 100-02. Second, part 2 of Appendix C-1 of the City-Krebs contract rebuts any contention by Collins that Krebs could be responsible for Collins's error or deficiency in not paying the appropriate federal wage rates. While Krebs may have agreed to make sure that Collins supplied weekly payrolls for the City's benefit, it never agreed to assume liability if Collins paid the wrong wage rates. As the language of the contract indicates, neither the City nor Krebs intended to enter into a contract to confer legally enforceable rights upon Collins. At most, Collins was incidentally benefited by receiving updated wage rate decisions so that it could assess its responsibilities under the Davis-Bacon Act and ensure compliance with the City-Collins contract. The City received the direct benefit of this contract, because Krebs's performance assured the City that the proper steps would be taken so that it would receive the funding promised by the EPA. A second provision in the Krebs-City contract also suggests a lack of intent to confer upon Collins a direct, legally enforceable benefit. Part 6 of Appendix C-1 pertains to remedies for disputes or claims between the City and Krebs. No reference is made to remedies available to any third party, such as the contractor. If the owner and engineer had intended to confer a direct benefit upon Collins as a third-party beneficiary, then the City and Krebs should have provided Collins enforceable remedies in this section as well. Nothing in the City-EPA grant agreement indicates that the purpose of that agreement was to confer a direct benefit upon the contractor. The City entered this agreement to obtain federal funding so that it could improve its wastewater treatment plant. This agreement, therefore, inured to the City's direct benefit. As a condition to receiving funding, the City agreed to require federal wage rates for all on-site construction workers. The City fulfilled this condition by delegating to Collins its duty to comply with the Davis-Bacon Act. Workers employed to assist in the construction were incidentally benefited by the federal wage requirements; however, the City-EPA contract was clearly not entered into for their direct benefit. Accord, Zeigler v. Blount Brothers Construction Co., 364 So.2d 1163 (Ala.1978) (power company rate-paying subscribers were not third-party beneficiaries of a contract between Alabama Power Company and Blount Brothers whereby the latter negligently constructed a dam for the former). The same is true for Collins. Nowhere in the agreement do the parties express an intent to confer a direct benefit on the contractor. We hold, therefore, that the trial court correctly determined that Collins is not a third-party beneficiary of either the City-EPA or the City-Krebs contract.