Virginia Supreme Court Holds that Sub-Subcontractor Could Not Maintain Third-Party Beneficiary Claim Against General Contractor

On public projects, payment bonds typically provide lower tier claimants with certainty of payment for their work in the event a contractor refuses or fails to pay. Unfortunately, even sureties go out of business from time to time, leaving some unpaid subcontractors and suppliers no recourse. In order to pursue other parties on the construction project higher up the chain of privity, one avenue is to sue as a third-party beneficiary claimant, thereby enforcing another party’s contract on the basis that the plaintiff is the intended beneficiary of the other contract. However, a recent Virginia Supreme Court decision may have foreclosed that route for most subcontractors and suppliers.

In Environmental Staffing Corp. v. B & R Constr. Mgmt., Inc., No. 111067, 2012 WL 1377178 (Va. Apr. 20, 2012), the plaintiff sub-subcontractor had sued the general contractor and the payment bond surety on a demolition project for a Portsmouth Redevelopment and Housing Authority facility in the City of Portsmouth, Virginia, seeking payment for asbestos abatement. After learning that the surety was insolvent and unlicensed to transact business in Virginia, the sub-subcontractor amended its lawsuit. It withdrew its payment bond claims and instead pursued a claim for breach of contract against the general contractor under a third-party beneficiary theory only. The general contractor demurred to the amended complaint on the grounds that the sub-contractor was not an intended beneficiary of the prime contract.

In granting the demurrer, the trial court relied upon an express clause in the prime contract titled “No Third Party Rights,” which precluded any contractual relationship between the project’s developer and any other contractor.  However, on appeal, the Virginia Supreme Court found that the “No Third Party Rights” provision did not prohibit the sub-subcontractor’s claim, because the clause also limited its preclusive effect to causes of action against PRHA and the developer; no mention was made of any action against the general contractor. Although the Supreme Court found that the trial court’s reliance upon the No Third Party Rights provision to grant the demurrer was an error, such error was harmless because the prime contract also included a provision which stated: “All rights under the Contract Agreement shall be for the benefit of Developer….”  The Supreme Court held that this language clearly precluded the sub-subcontractor from being an intended beneficiary under the prime contract. Although the Virginia Public Procurement Act’s payment bond provisions were incorporated into the prime contract by operation of law for the subcontractors and suppliers such as the plaintiff, merely incorporating that statute was not enough to override the express intent of the parties’ contract. Therefore, the Supreme Court upheld the trial court’s dismissal of the sub-subcontractor’s action.

While the Environmental Staffing decision held that the subcontractor could not assert a third-party beneficiary claim against the general contractor, the subcontractor was not without a remedy. The Court noted that under the payment bond, the general contractor and surety were jointly and severally liable to bond claimants. Claimants should obtain and evaluate their respective rights under all contracts and bonds in the chain of privity to determine the best strategy for obtaining a recovery.