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'Buffer zone': sword or shield or both.

|Buffer zone': Sword or shield or both

The relationship, or lack of it, between an owner and a subcontractor is sometimes confusing. Typically, on major construction projects there is no relationship between an owner and a subcontractor since the owner deals directly with its general contractor who in turn deals exclusively with its subs.

Recently, a federal appeals court citing Delaware State law stated that the typical general contract creates a "buffer zone," between an owner and a subcontractor. This "buffer zone" according to the court in Pierce Associates, Inc. vs. Nemours Foundation, 865 F.2d 530 (3rd Cir. 1988), "insulates" the owner from the subcontractors "both during the course of construction and during the pursuit of remedies in the event of a default." The subcontractors, on the other hand, are "insulated from the owner."

In Pierce, the owner of a hospital attempted to extinguish this so called "buffer zone" in an effort to uphold a multi-million dollar judgment it recovered against a mechanical subcontractor for breach of contract on the legal theory of third-party beneficiary, or, in other words, the owner contended that it was the beneficiary of the contract between the general contractor and the mechanical subcontractor which created a quasi-contractual relationship between the owner and the sub.

The owner in Pierce had entered into a contract with a general contractor for construction of the interior of the owner's hospital. The general contractor engaged several subcontractors, one of which was the mechanical subcontractor. The project was plagued by serious delays and contract disputes. Consequently, the owner withheld payments and the mechanical sub "abandoned" the project. Litigation later ensued between the parties on the project.

Both the general contract and the subcontract incorporated the American Institute of Architects' General Conditions (1976 ed.) which contained Article 1.1.2 which states, "nothing contained in the Contract Documents shall create any contractual relationship between the Owner of the Architect and any Subcontractor or Subsubcontractor."

Among several issues on appeal was whether the trial court erred by holding that the owner was a third-party beneficiary of the subcontract. In an effort to persuade the court that a third party beneficiary relationship existed between it and the sub, the owner argued that the language of Article 1.1.2 did not preclude the subcontract itself from creating a contractual relationship between the owner and the subcontractor. In support of its argument, the owner relied on several provisions of the subcontractor which imposed various obligations upon the sub with respect to the owner, for example, the obligation to furnish shop drawings, erection drawings, etc., for the owner's approval.

The appellate court was not convinced. It stated, "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."

The court further stated that, "In order for there to be a third-party beneficiary, the contracting parties must intend to confer the benefit . . . [t]he intent to confer a third-party beneficiary benefit is to be determined from the language of the contract ... and from the context in which it was written."

The court recognized the fact that it was dealing with a general contract and a subcontract in the construction industry where "[t]he owner deals with and, if necessary, sues the general contractor, and the general contractor deals with and, if necessary, sues the subcontractors."

In reviewing the language of the subcontract, the court explained that "[o]f significance is the incorporation of the standard AIA General Conditions," particularly Article 1.1.2, "into both the general contract and the subcontract." That language, the court found, created a "strong indication of an intent" on both the part of the general contractor and the sub "to maintain the separate owner-general contractor and general contractor-subcontractor relationships."

The court provided:

"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."

After deciding other issues in the case, the appellate court overturned the owner's judgment against the subcontractor which it had obtained in the lower court.

The decision in Pierce offers a rare look at a situation where an owner attempts to utilize the doctrine of third-party beneficiary as a sword rather than a shield. It is evident from the decision, however, that courts will not "Depart from the typical owner-general contractor and general contractor-subcontractor relationships" unless there is a clear intent in the contract documents to do so. This is generally not the case.

Peter Goetz, Esq., is a senior member of the New York- and New Jersey-based law firm of Goetz, Fitzpatrick & Flynn which concentrates its practice in construction and real estate law and related fields. The firm litigates and arbitrates construction and real estate matters throughout the United States and abroad. Goetz is both an attorney and a graduate civil engineer.
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Title Annotation:Construction Corner; between owner and subcontractor
Author:Goetz, Peter
Publication:Real Estate Weekly
Article Type:Column
Date:Nov 6, 1991
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