Owner Not A Third-Party Beneficiary of A General Contractor-Subcontractor Contract

A look at the case of Outlaw v. Airtech Air Conditioning & Heating, Inc.

Unless a contract specifically provides otherwise, an owner is not a third-party beneficiary of a standard contract between a general contractor and a subcontractor. This principle is illustrated in the case of Outlaw v. Airtech Air Conditioning & Heating, Inc., 412 F.3d 156 (D.C. Cir. 2005).

In this case, an owner hired an architect to draw up the architectural plans required to secure construction permits for renovations to a recently purchased building. The plans included renovations of the building's heating, ventilation and air conditioning (HVAC) systems. The owner retained a general contractor for the project, and the general contractor retained a subcontractor to install the HVAC system. The owner played a very hands-on role over the course of the project. In particular, the owner was heavily involved in many of the project's details which were normally handled by the general contractor.

As the project progressed, problems arose and the owner decided to end his relationship with both the architect and the general contractor. Notwithstanding, the owner requested the subcontractor finish the work on the HVAC system. The subcontractor declined the owner's request; the subcontractor explained that his company was contractually bound only to the general contractor and not to the owner. As a result, the owner hired another firm to finish the HVAC work. However, after the owner moved into the building, the owner discovered the new HVAC system did not work properly and sued the original subcontractor for breach of contract and damages.

Based upon traditional contract law principles, the court found that absent any indication to the contrary in a contract, a property owner is not a third-party beneficiary to a contract between a general contractor and subcontractor. In addition, the court established the standard form contract between the contractor and subcontractor did not contemplate a role for the owner and could not be construed to confer specific rights on the owner. As such, the subcontractor had no duty to the owner, and the court held in favor of the subcontractor.

In response, the owner argued his company was a third-party beneficiary to the general contractor-subcontractor contract because the contract contained language providing that the owner was entitled to "keep any and all parts." In addition, the contract contained a signature line for the "Owner/General Contractor."

The court noted that beyond the language that the owner was entitled to "keep any and all parts" and the signature line — which was actually signed by the general contractor — the general contractor-subcontractor contract contained no further references to the owner. Moreover, the court observed there was no course of dealing between the owner and the subcontractor which would suggest the owner was a third-party beneficiary to the contract. The owner played no role in the contractor's selection of the subcontractor, and although the owner was very hands-on during the construction process, the subcontractor did not acquiesce in the owner's efforts to step into the general contractor's shoes.

Accordingly, a project owner should be aware that irrespective of its level of involvement in a project, it may not become a third-party beneficiary of a general contractor-subcontractor contract unless the contract specifically provides otherwise.