Contract law and third-party beneficiaries of contract
The idea there could be a third party to the contract sharing the benefits of the contract but negotiating nothing away for it, and whose identity was unknown to the signatories of the contract is absurd on the face of it. However, with publication of the “Restatement of Contracts, Second,” the American Law Institute provided such a foundation. The third-party beneficiary in the “First Restatement” (1933) was mostly used with insurance but it was occasionally brought into contract law. However, by the “Second Restatement” in 1979, the concept had grown in substance and was brought into construction contract law.
ALI recommended using an ‘intent to benefit test’ to determine who could claim standing as a third-party beneficiary. The problem with a vague term like ‘intent to benefit’ is it could conceivably apply to any contractor or subcontractor that could benefit from the architect/engineer’s (A/E’s) contractual duties and obligations to the owner.
Exclusionary declarations owner-architect agreements are generally recognized to be definitive, and they successfully bar claims by potential third-party beneficiaries. Although, the issue of negligent misinformation is more prescient.
The tort of negligent misinformation
In the “Restatement of Torts Second:” Section 552, “Information Negligently Supplied for The Guidance of Others,” ALI described the tort of negligent misinformation as:
One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary losses if he fails to exercise reasonable care or competence in obtaining or communicating the information.
Since publication of Tort Section 552 in 1979, claims for negligent misinformation brought by contractors against architects have become the most common exception to the economic loss rule.
In Guardian Construction Co. vs. Tetra Tech Richardson, Inc. (1990 Delaware) the Court, in response to the defendant’s (architect’s) request for summary judgement on the basis of lack of privity, concluded:
For the foregoing reasons, the Court concludes that as to the Plaintiffs’ claims that the negligently prepared project plans and specifications and the information conveyed at the pre-bid meeting were prepared and presented by TTR (the architect) for the use of a specific and limited class of potential users of which Plaintiffs were known members, and because Plaintiffs were intended to and did rely to their detriment on that information in preparing their project bids, Plaintiffs’ negligence and negligent misrepresentation claims are cognizable despite the lack of contractual privity with TTR and the fact that Plaintiffs seek purely economic damages.
In the concluding article in this two-part series, coming next week, this author will discuss justices using modern tort theory provided by the American Law Institute in the “Restatement Second of Tort (1979),” and how they have brought about a significant transfer of risk from the contractor and owner to the architect-engineer. By providing contractors with these new risk-shifting strategies, justices have upended the balanced contractual relationship that has been the corner post of construction contracting, diminishing the architect’s oversight during construction.
(Research and conclusions in this two-part article are for informational and educational purposes only and are not intended as legal recommendations.)
Paul Potts is a technical writer and construction administrator. He has worked in the construction industry as an independent contractor and administrator for architects, engineers, and owners in Michigan. Potts can be contacted via e-mail at email@example.com.